Maybe it’s because a large order came in. Maybe your biggest customers are late on their invoices. Maybe it’s growing fast, but your business hasn’t quite cleared the bar for bank financing. Whatever the reason, you’re feeling the squeeze and could use an influx of cash, but you’re not sure about your financing options.
If so, it’s time to take a closer look at invoice factoring—and to debunk common myths about this financing option.
What is Invoice Factoring?
Invoice factoring is a financing method in which a business sells its accounts receivable to a factoring company. The factoring company provides an immediate cash advance, then collects on these unpaid invoices from the business’s customers—and finally pays the business the balance of the invoice minus a service fee.
Invoice factoring can benefit businesses of any size, at any stage of maturity, from start-up to established companies seeking an alternative to bank financing. Misperceptions about invoice factoring are common, though, so let’s break them down.
Myth #1: Invoice factoring is only for companies in trouble.
Unfortunately, many business owners either don’t understand invoice factoring or see it as a sign their business is failing. Yes, invoice factoring can be an option when a business is rebuilding credit or facing difficulties, but it’s not the only condition under which a business might factor its invoices. New companies may not yet qualify for bank financing, given the rigors of the process, but can access working capital through factoring invoices. Established businesses can also benefit from an injection of working capital to cover a temporary cash crunch, land a new business opportunity, or make an acquisition while fulfilling payroll and vendor commitments.
Myth #2: Traditional financing is better.
Mostly true. Bank financing and lines of credit are certainly the mainstay for many businesses, but they aren’t the only option. Sometimes they aren’t even an option, or if they are, they don’t provide enough funding for your growth. Financing options outside the bank that can help your business meet its commitments and grow deserve consideration, whether your company is new, facing challenges, or simply in need of immediate access to working capital.
Myth #3: You'll give up control of your company.
Many owners are reluctant to give up any control over their decisions and operations, and this is understandable. A factoring company may decline to purchase invoices of customers representing a credit risk, but for many businesses, it’s the exception and not the rule. Business owners risk ceding much more control by taking on investors for an injection of capital.
Myth #4: Invoice factoring is more expensive than traditional financing.
Yes, sometimes. Funding from invoice factoring, though, gives you much greater financial leverage—and fast access to working capital when you need it. Factoring fees almost always are more than interest on a line of credit, but if factoring allows you to grow faster and take on more sales, the additional profits should exceed the additional costs.
Myth #5: Fees are due up front.
If this were true, it would defeat the purpose of invoice factoring, which is to give you immediate access to working capital for your business. Most factoring companies advance a percentage when purchasing your accounts receivable, with the balance paid to you when the company collects on them, less a fee. This gives you access to cash when you need it most.
Myth #6: Invoice factoring takes too long.
Applying for bank financing can be a lengthy process—and many business owners assume the same about invoice factoring. The reality is that the approval process for invoice factoring is built for speed. Factoring companies understand that their clients are looking for immediate cash. It’s why screening and approval are designed to get you funding as quickly as possible, often within five days, and sometimes faster.
Myth #7: You must factor all your invoices.
Business owners might assume that they have to turn every one of their accounts receivable over during factoring, but this isn’t the case. Some invoices may be better candidates for factoring than others, as determined by size, days outstanding, and other variables. Factoring can be a one-time financing option or provide ongoing access to capital. Many companies also eventually transition from invoice factoring to traditional bank financing.
Myth #8: Invoice factoring will damage my company's reputation.
Many business owners are the face of their business, and they might fear the fallout if it appears that another entity is collecting on their behalf. Today, with the rise of third-party vendors that perform treasury management services for businesses, it’s likely to not even raise an eyebrow. In fact, a business’s customers may appreciate streamlined billing and flexible payment terms offered through invoice factoring with the right company.
Considering the benefits of factoring your invoices? We can help. Prairie Business Credit is a national working capital provider to young, growing, or recovering businesses. We offer accounts receivable financing, purchase order financing, and equipment financing. Our company serves both as a trusted financial resource and consultant to entrepreneurs dedicated to building their businesses and ensuring their success.
Purchase Order Financing and Factoring
How Does Factoring Work?
Calculating the Benefits of Factoring
When Should You Consider Factoring?
Factoring in Five Simple Steps
13 Week Cash Flow Forecast
Businesses Need to Protect Their Cash Flow During the Pandemic
The Cash Gap
Our Second Client Defrauded Us - How it Changed the Way We Do Business
Is Prairie Business Credit Expensive? How Much Do They Charge?
Top Ten Reasons to Factor
You Need Cash for Growth
Who are Good Candidates for Factoring?
Our Number One Goal is that Our Clients Leave Us
A Bridge to Where?
In the Age of the Internet, We Still Do Business Face to Face
Two Fundamental Principles When Giving Your Customers Payment Terms
Team Up with a Factor To Earn Lifelong Business Customers
Make No Little Plans
Prairie Business Credit Promotes Morgan
Prairie Business Credit Promotes Diversey