Some of the businesses which would most benefit from invoice factoring avoid it as a funding source because of common misnomers. The result is that these business owners turn to more expensive and less advantageous funding sources.
It could be very important for your business to consider factoring! We'll assess the most common myths about invoice factoring so that you can make a better assessment as to whether it is a strong option for your business.
1. You Have to Factor All of Your Invoices
When you work with a factoring company, you
agree upfront which of your invoices you’d like to factor and which you do not.
While some factoring companies will only agree to work with you if you factor
all of your invoices, others are more flexible. This is a term that is up for
negotiation, and not set in stone.
2. You Have to Pay Factoring Fees Upfront
You pay a fee for factoring, and it is
usually a percentage of the total invoice. You don’t need to pay this fee
before you submit an invoice. Instead, the factoring company takes their fee
out when they send you the money for your invoice. This means that you only pay
it when you have cash or, more accurately, when you get cash. Indeed, the factoring company doesn’t make any money until they actually collect
payment on the invoice.
3. Factoring is More Expensive than Bank
Financing
While some bank financing options could be
more affordable than factoring, you shouldn’t assume that factoring is
necessarily more expensive. Bank financing could end up costing you more down
the road, especially if you’re getting large loans with long terms and/or high
interest rates. The potential that factoring can limitlessly grow alongside you
also trumps the potentially crippling wait for bank financing increases. With
factoring, you don’t have to miss out on opportunities waylaid by bank
financing because factoring focuses
on the credit of your customers rather than your own personal credit. Most factoring companies also work much more quickly than banks, so
you'll get the financing and related paperwork approved much faster. This is
critical because we all know that time is money! Work out the numbers for
yourself to discover which is the more affordable option for you.
4. Your Business/You Probably Won’t Qualify
Your personal credit might matter much less
than you think when you’re applying for factoring. Your business’ financial
state may also matter less than you think. Most incorporated businesses and
especially most B2B companies will qualify for invoice factoring. That’s no
guarantee, but it is certainly worth looking into instead of assuming you will
not qualify.
5. You Can No Longer Choose Your Clients
You worked hard to make a business where
you’re in control, and you don’t want to make any decisions to undermine that.
Many business owners worry that the factoring company will have undue influence
in their business. The most control a factoring company can exert is saying that
they are unwilling to factor invoices from a certain client. You can still work
with that client.
In fact, most business owners find that
with a stable cash flow from factoring, they actually feel more control in
their business and better positioned to make the critical decisions that they
need to.
6. Factoring is Only for Struggling
Businesses
It’s true that many struggling businesses
turn to factoring to bolster their business and survive hard times. It's also
true that many successful businesses also turn to factoring to help them grow, function
more efficiently, and achieve their goals.
Do you want more factoring facts? Reach out to JD Factors today to discuss if invoice factoring is the right option for your business.
