Many different companies and businesses use receivable factoring as a simple, effective and cost-effective option to providing short-term cash flow in the business. Since factoring is used in just about every business sector, dispelling some of the myths around this historic practice for business funding is important.
To examine the truth about using receivable factoring service, consider the following myths and the truth about the service and the solutions it provides to businesses.
Only Poorly Run Businesses Use Factoring
Most businesses that have temporary cash flow problems do not have poor business practices. In fact, the companies using receivable factoring have to have at least $25,000 in invoices that meet the approval for the factor, which actually signifies a healthy and productive business.
Even the best run companies can have periods of time when gaps in invoicing and payment result in cash flow problems that can be easily resolved using receivable factoring instead of complicated business loans or lines of credit.
Factoring Creates a Negative Cash Flow Cycle
This myth is simply unfounded since receivable factoring is not financing in the traditional sense and it is not a loan. It is funding based on work already completed or product sold and invoiced for. The factor is simply providing funding based on invoice that has already been generated, and with no repayment or interest, there is no possibility of creating a negative cash cycle with the process.
Factoring is More Costly than Loans
There is a small fee the factor earns for providing the receivable factoring service. This will be a percentage of the total amount of the invoices. The best factors do not charge hidden fees or extra costs for the service, and there is only the one-time fee deduction once the buyer completes the payment and the invoice is closed.
When compared to the monthly or daily interest paid on a long or short-term business loan and the potential penalties and fees, the loan is often the most costly of the two options.
Factoring is a Complicated Process
The most experienced and effective receivable factoring services have the ability to work with their clients in a very short and streamlined online application process. There is much less paperwork than a loan, and the factor will determine the creditworthiness of your customers…
For most businesses, using receivable factoring services is not just easier during the invoicing process, but it also allows the factor to handle collecting the payment and processing the paperwork. This creates a back office service as part of the processes, freeing up your staff to work with current clients.