Fictional stories are imaginative, while nonfiction ones are based on real events. Distinguishing between each is similar to assessing trustworthy financial approaches. In both cases, it's about seeking the truth and deciding what to believe.
Factoring is a valuable financial solution for a wide range of businesses, yet there are common misconceptions or myths associated with this type of financing. In this blog, we dive into misconceptions surrounding invoice factoring and explain how reality is far different than these myths.
Reality: Contrary to popular belief, invoice factoring is not a last resort for a desperate business. It's a strategic financial tool utilized by savvy companies across various industries to enhance cash flow and support long-term growth initiatives.
Reality: While certain financial solutions, for example, merchant cash advances (MCA), belong in the category of predatory lending, factoring does not and has key differences that separate it from these practices.
Businesses primarily use factoring to manage and improve their cash flow and maintain ongoing operating expenses. In contrast, MCAs serve the needs of businesses that need one-time quick access to cash to cover immediate expenses.
Factoring involves the purchase of invoices or accounts receivable, with the factoring company assisting in the collection of payments from the debtor. The terms and fees associated with factoring are typically transparent and agreed upon in advance. Significantly, factoring is not a loan and does not show on the balance sheet.
On the other hand, the terms of merchant cash advances are less transparent, and borrowers may not fully understand the high cost of borrowing or the method for repayment.
Reality: Factoring is typically more expensive than a traditional bank or small business loan. But if a company is facing cash flow challenges and is unable to obtain a bank or small business loan, factoring may be their best, or only option. And as interest rates rise, the cost gap narrows.
Despite its higher-than-bank-loan costs, invoice factoring improves cash flow, can allow businesses to continue operations, continue selling product, and improve revenue. Oftentimes, without factoring, businesses are unable to improve their growth trajectory.
Additionally, the cost of factoring is offset by the immediate and ongoing cash flow injection it provides. For businesses that must delay paying bills due to not having enough cash-on-hand, it eliminates the costs associated with late payments, such as financing fees or late payment penalties. In many cases, the increased cash flow generated through factoring far outweighs the associated fees.
Reality: Generally, factoring offers a relatively quick way for a business to access working capital, and the process to get approved for a factoring line is typically less complicated and requires less documentation than a small business loan or bank line of credit.
Additionally, factoring is an ongoing source of funding and once a line has been opened, the business receives their payments quicker than if they waited for their customers to pay the invoices.
When businesses must overcome payment delays, seasonal fluctuations, or need cash for business operations, every minute counts.
Reality: Contrary to belief, this can be a mutually beneficial partnership. By referring a client for factoring services, banks can solidify their relationship with their clients and improve their clients’ financial condition. Many factoring companies do not take deposits and as such, pose no threat to the banking relationship. In many cases, as factoring helps improve a company’s cash flow, the liquidity of the company improves, and the banking relationship improves and grows.
Recommending invoice factoring demonstrates adaptability and a commitment to supporting clients' diverse financial needs. It's a sign of a progressive and forward-thinking institution that is willing to explore innovative solutions to benefit both the bank and its clients and can foster a deeper sense of trust and loyalty.
Reality: Factoring companies serve business-to-business (B2B) companies and can serve many different industries. In fact, most invoice factoring companies have extensive expertise in a few industries and have deep knowledge of the customers served, but this is often overlooked. These industries include:
Transportation and trucking
Manufacturing
Construction
Staffing
Healthcare
Oil and gas
Wholesale distribution
Recycling and Waste
Security Services
And more!
The team at Commercial Funding Inc. will be happy to address any additional myths or concerns you have about accounts receivable financing and invoice factoring. We have many case studies that demonstrate the true reality and the positive impact this type of financing has made on companies across the U.S. and in various industries. In many cases, factoring was able to make a difference when a bank was unable to help.
Check out these specific examples:
Factoring Provides Working Capital For Medical Device Manufacturer - A medical manufacturing company needed additional capital to support employee growth and ensure they could continually meet payroll obligations. Their bank denied a request for a credit line increase.
Start-up Company Didn’t Qualify for Bank Financing – A young security company couldn’t get a bank loan due to lack of business history. An invoice factoring line provided the increased cash flow they needed to meet payroll and hire new employees to take on additional work.