Last Updated on January 19, 2021
All growing businesses reach a critical juncture when they need access to capital to get to the next level. Whether it’s for hiring more staff, expanding operations, buying inventory, or taking on new customers, small businesses often come up short due to the lag between growing sales and the cash flow it creates. Factoring invoices is becoming a go-to funding source for businesses that don’t want to rely on traditional financing through banks.
Although invoice factoring has been a legitimate funding solution for several centuries, it is often misunderstood, leading to misconceptions about what it is and how it works. These are some of the more common myths about factoring along with the actual facts that debunk them.
Myth #1: Factoring is only for struggling, failing businesses
While factoring is a possible solution for businesses experiencing financial problems, it is more commonly used by growing businesses that need a reliable source of capital. Instead of trying to obtain a bank loan or line of credit, which can be less flexible and difficult to qualify for, businesses can use factoring for quick and easy access to the capital they need to keep growing their business. For many businesses, having a mechanism in place, with ready access to cash when it’s needed, is sound financial management.
Myth #2: Factoring is expensive
Invoice Factoring may not be the least expensive form of financing but, when you add up all of its benefits, it can be less costly than traditional financing. Because bank loans have fixed terms, businesses can end up carrying debt and paying more in interest costs over time. With factoring, businesses can control their financing costs by only paying a fee for temporary access to capital. And, because factoring is considered a transfer of assets, it is not carried as debt on your balance sheet. In addition, providers offer essential back-office services such as invoice verification, billing, and collections, which can reduce a business’s operating costs.
Myth #3: Factoring companies harass your customers
For any factoring company that wants to be successful, it is vital that the relationship between a business and its customers remain positive. A reputable company strives to treat customers professionally and respectfully so they can build on their relationship with the business.
Myth #4: My customers will hate that I’m factoring their invoices
Whether it’s through a bank or a factoring company, businesses use financing to enhance their business and support their growth. Customers generally want to know that a business has sufficient capital to meet their needs. They also know that most businesses use financing to access capital. For many businesses, it’s is a better financing option because it is more responsive to its needs.
Myth #5: Factoring companies won’t work with businesses that are not “established”
Factoring is a fast-growing industry and the market is highly competitive. While you may find that some of the larger and more established providers shy away from smaller businesses, there are many more that will take your business. If your business is growing, you should have no problem finding an up-and-coming provider that wants to grow with you.
Myth #6: I can’t use factoring if I have a low credit score
Another advantage of factoring over traditional financing is your business doesn’t need to have a credit history to qualify for financing. Providers rely on the creditworthiness of the business’s customers in qualifying it for factor financing.
Myth #7: All factoring companies are the same
As with any industry, some factoring companies are better than others. Some operate purely as a middleman between a business and a bank, passing borrowing costs on to their customers. Those that are struggling to achieve profitability tend to skimp on customer service or technology. Some want to lock clients in unfavorable agreements. But most factors are interested in building solid, mutually beneficial relationships with their clients. It’s important to do the research to find the best factoring company for your needs.
While factoring isn’t new, its use is growing among businesses that need more financing options. So, it’s not surprising that there might be some misconceptions. However, when businesses realize that providers want to be a partner in their growth, it can be the beginning of an enduring relationship.
altLINE is a direct source of funds so we are not exposed to borrowing costs that other independent financing and factoring companies pass on to their clients. And, unlike other providers that hide a range of fees, our transparent pricing structure keeps you in control of your financing costs.
If your business needs a responsive and reliable source of capital, contact us about factoring with altLINE and get a free quote today.
Grey is the Director of Marketing for altLINE by The Southern Bank. With 10 years’ experience in digital marketing, content creation and small business operations, he helps businesses find the information they need to make informed decisions about invoice factoring and A/R financing.