As a business owner, did you know you have a range of financing options available to you? However, it can be challenging to sift through and understand which route may suit you best. For example, unfamiliarity surrounding invoice factoring for businesses leads to unfortunate misconceptions about the service. Invoice factoring, also known as accounts receivable financing, is an alternative financing business solution that involves selling an account receivable or invoice at a discount to get immediate cash while waiting for invoice payments from customers.
We’ll dispel five myths about invoice factoring to help you better understand the service and choose a factoring partner.
Myth #1 Factoring Means Your Business Is In Trouble
Many business owners may view invoice factoring as an indication that their business is failing. While invoice factoring can help a business experiencing challenges, there are many other reasons a business owner may benefit from it. For example, many companies may use the service for an injection of capital to help them grow, to cover a temporary cash flow issue, or to pursue a timely investment opportunity while continuing to operate normally and fulfill payroll and vendor payments. In these cases, invoice factoring simply meets a temporary need, freeing up capital so business owners can focus on building their business.
Myth #2 Factoring Is Expensive
Like any funding option, many factors will determine the rate and terms for receiving immediate capital but that doesn’t mean it will be expensive for your business. Trusted providers should offer straightforward pricing and outline costs transparently so you avoid any surprises later. For example, a firm may charge a small percentage of each factored invoice. We always encourage business owners to beware of teaser rates that seem too good to be true because they probably are.
Myth #3 Factoring Is Only for Larger, Established Companies
Invoice factoring isn’t only reserved for large or long-established companies. Factoring is for any business that cannot secure traditional funding or needs additional capital to take their business to the next level and even start-ups experiencing rapid growth. Funding firms should look at the individual circumstances of your business, from revenue and industry type to credit and other factors, to determine if factoring can help. So factoring may be a solution whether you’re just starting or are an established business.
Myth #4 The Factoring Process Is Cumbersome
When a business needs immediate cash, its owner may assume it’s a lengthy process to get into a factoring agreement. In reality, many firms that provide factoring design their screening and approval process specifically for timely situations like this to provide funding as quickly as possible, sometimes on the same day.
It should also be a simple process to get out of a factoring agreement. At its core, factoring should be a short-term solution for businesses that allows owners to stop the service when they’re ready or able to secure traditional financing through a bank.
Myth #5 Factoring Is the Same Everywhere
On a fundamental level the factoring process should be the same everywhere. However, there are distinctions between providers based on the type of client care, resources, and personalized solutions they offer businesses. When selecting a firm to work with, here are some questions to consider:
- Are they a direct lender or do they use a third party? A direct lender can help streamline the process and avoid a lengthy back-and-forth between advisors, clients, and underwriters.
- Do they offer objective guidance? Ensure the firm is taking the time to learn about your business and situation to find the right solution for you without recommending products or services that may not serve you best.
- Do they specialize in specific industries? It’s always helpful to work with a partner that understands your business’s industry to help guide your options.
- What is their fee structure? As we’ve already mentioned, you want to ensure pricing is straightforward and the firm clearly outlines fees and other costs so you can avoid unanticipated expenses later.
As you can see, some misconceptions can make business owners hesitant about invoice factoring, generally due to an assumption or lack of information. However, these myths can also mean business owners overlook an opportunity that could genuinely help when they need it most. We’re happy to discuss these concerns and other questions business owners may have using our objective, straightforward, and educational approach. If you or someone you know would like to learn more about how factoring and other alternative financing solutions can help your business, please get in touch with our team today.