Setting the Record Straight: Debunking Invoice Factoring Myths
May 1, 2012
Every industry has to deal with its share of misconceptions and the invoice factoring business is no exception.
Despite widespread acceptance in dozens of industries and thousands of companies, factoring is still misunderstood by many business owners and operators whom it could benefit. Concerns tend to focus on the costs of a factoring program and on how companies using factoring programs might be perceived by their customers.
So in the spirit of setting the record straight, here are 7 factoring myths, debunked.
Myth 1: Invoice Factoring will Create a Negative Perception of My Company
When the factoring program is properly introduced to your clients, this should not happen. In reality, the fact that your company has been approved for third-party funding is a positive because it shows that your clients are credit-worthy, your business is stable and healthy cash flow is expected. Once notified of the factoring program your clients may have a few questions, but will quickly come to view the situation as your new (and probably more efficient) receivables department.
Myth 2: Invoice Factoring is New, Gimmicky, or Unstable
Factoring has existed in various forms for centuries and is recognized as a useful business financing tool in more than 70 countries. Industry estimates place annual factoring volume at more than $110 billion in the U.S. alone. Factoring programs benefit companies in many diverse industries including staffing, health care, manufacturing, transportation and freight, and retail.
Myth 3: Invoice Factoring is too Expensive
A reputable factoring company will immediately provide you with at least 80% of the amount owed on your receivables, then pay the balance – minus the factoring company’s service fees – upon collection.
The key is to engage in a completely transparent program with the factoring company. There should be no surprises, hidden fees, or unexpected charges related to your factoring arrangement. Make sure you understand exactly how the fees are calculated.
In a sense, a factoring plan turns an invoice into a C.O.D. sale, as opposed to a 60 day credit extension to your customer. Given the other alternatives – payments on a line of credit, traditional bank loans with inflexible terms, liquidating certain assets to meet obligations – the costs associated with invoice factoring are reasonable. Contact MP Star Financial for a complete explanation of the expenses associated with factoring at 800-833-3765 Ext. 150.
Myth 4: Invoice Factoring is for Businesses with Serious Cash Flow Problems
Factoring allows your company to manage existing receivables more effectively. It’s true that some companies can’t qualify for a factoring program because either their finances are in especially bad shape or their customers have poor credit conditions that would not allow for approval. The successful implementation of a factoring program is a positive step for most businesses as it indicates stability, a reliable customer basis, and prospects for growth.
Myth 5: Factoring Firms Alienate Customers with Aggressive Collection Practices
The success of a factoring company relies on positive relations between its clients and their customers. Jeopardizing those relations through strong-arm collection tactics benefits no one. Any direct contact with your customers is handled in a highly professional manner.
Myth 6: Factoring will Cause My Company to Lose Customers
As noted before, when introduced properly a factoring program will be interpreted as a positive development by your customers. Besides, factoring actually allows you to spend more time serving your customers needs and less time chasing down receivables and worrying about cash flow. Streamlining this part of your business and operating more effectively lets you serve your current accounts better and devote more attention to finding new ones.
Myth 7: Factoring Companies Won’t Understand My Business
While all businesses and industries have unique features, factoring companies are experienced in handling a wide variety of circumstances and situations. A preliminary discussion can answer many questions that you might have pertaining to your company’s particular needs.
MP Star Financial’s invoice factoring services can help ensure you have cash flow needed to run and grow your business. Call MP Star Financial for more information at 800-833-3765 Ext. 150.