There are a lot of misconceptions about Factoring accounts receivable. The two biggest myths are It Costs Too Much and Lack of Flexibility. That may have been true in “the old days” but nothing could be further from the truth today.
It May Cost More NOT to Use Factoring
Ask someone on the street and they may tell you that factoring will cost you anywhere from 10% to 50% per transaction. Of course these people have never actually used factoring (if they did we sure would like to know who charged them that much).
In reality, an experienced finance professional will tell you that the average opportunity cost to factor is between 2% and 5%. Yes, some factoring companies will do deals at 1% but these are typically reserved for Fortune 500 payers and exceptional circumstances.
The fact is, not factoring may cost you a lot more. Many companies are able to take advantage of volume discounts and COD pay alternatives – thereby not only offsetting the cost of factoring but sometimes even profiting from it!
Be Flexible
Some business owners don’t realize the factoring process comes with many options, all in the hands of the business, not the factor.
For instance, not all invoices need to be factored. The business decides which invoices to factor and which ones to retain. On some months the business may obtain cash advances on several invoices to accommodate bills on other months they may not factor at all.
The company, not the Factor, decides how long the relationship lasts. Most companies will factor two to three years on average and then have enough cash on hand to facilitate any expansion. Other companies never leave the factoring process, as they are able to use the ongoing cash flow to continue increasing the profitability of their company.
Combining with other alternatives such as using the factor’s Credit Risk Analysis, Recourse and Non-Recourse Options, and the “Insta-Pay” Programs all give Factoring an A+ when it comes to financing flexibility.
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