Five FAQs That Small Business Owners Ask About Factoring (And How YOU Should Respond)

If you’ve ever had a hard time convincing a business owner why he/she should use factoring, then I suggest you keep reading.

I can assure you that if you’re prepared and possess the right attitude when approaching entrepreneurs about factoring, then you’ll be able making commissions in no time.

In order to help factoring brokers better be able to sell the concept of “factoring” to incredulous small business owners, here are five common questions that that small business owners ask about factoring and more importantly, five answers to those questions.

1. What Exactly is Factoring?

Factoring is an alternative financing option that is best suited for companies that are just opening their doors or that started to grow faster than they had originally anticipated.

Because factors rely on being paid by the business owner’s customers, the business owner’s personal financial history as well as the company’s credit standing does not have any bearing on its qualification.

Specifically, factoring is a way for business owners to easily bridge the gap between when a company invoices their customers and when they receive payment for those invoices.

I recommend factoring brokers explain the ins and outs of factoring in a short series of steps like the ones below:

a) The customer requests goods/services from XYZ Company

b) XYZ Company delivers the goods/performs the services

c) XYZ Company issues an invoice to the customer, and then sells that invoice to a factoring company

d) Upon verification of invoice, the factor advances up to 90 percent of the invoice’s value to XYZ Company

e) XYZ Company’s customer pays the factor

f) Upon receipt of payment, the factor will release the difference between the collected amount and the advance, minus the factoring fee

2. What Do All of These Fancy Factoring Terms Mean?

When you have been working in the factoring industry for awhile, it’s easy to get caught up using industry-specific jargon. However to a small business owner who is vaguely familiar with the concept of factoring, the verbiage may sound like a foreign language.

So I strongly recommend that factoring brokers take the time upfront to explain some of the more commonly used factoring terms to your clients so they will better be able to understand you as well as the factoring process.

Debtor: another name for the your clients’ customers; the entity that the factor collects from

Accounts Receivables: money owed to the client

Advance Rate: the percentage of money that a factor fronts its clients when it purchases an invoice (usually 70-90%)

Factoring Fee: fee the factor charges after it’s collected on an open invoice

Reserve: remaining funds distributed back to the client after an invoice has been paid and the factor has taken its fee

PRN Healthcare Factoring

3. What Will My Customers Think if I Use a Factor?

One big fear that business owners have about using a factoring company is that their customers will think that their business is in financial distress. Luckily, this negative-sounding myth can easily be debunked by providing just a handful of insightful responses.

The first way to put a skeptical business owner’s mind at ease is to explain that factoring is one of the oldest methods of financing available to companies like his/hers. I’ve found that it helps when factoring brokers explain factoring as something similar to a credit card transaction. Basically, when a consumer uses a credit card, the credit card company fronts the money with the understanding that if it’s not paid back in a timely manner, a fee will be assessed. The same is true for a factoring transaction.

Next, factoring brokers should emphasize that not every business can qualify for a line of credit. Furthermore, the fact that the business owner is able to work with a factor delivers an important message to that company’s customers—that the business is solid, rapidly growing and in high-demand.

Finally, factoring brokers should explain that both the business owner and his/her customers benefit from a factoring relationship. The business owner’s customers benefit because they know they don’t have to pay their invoices right away. In the meantime, the business owner who is factoring can get money the same day he/she invoices, allowing them to stay on top of financial obligations.

4. What’s Really In It for Me?

Although there are many reasons why business owners should take advantage of factoring, brokers should be sure to mention the following:

  • Receive cash the same day you issue an invoice
  • No debt created
  • Eliminate unnecessary overhead costs
  • Leverage the creditworthiness of your customers
  • Receive early payment discounts
  • Build the company’s credit

5. Why Should I Work with a Factoring Broker to Help me Find a Factor?

This should be an easy question for you to answer—I would recommend that you explain to the business owner that there are literally thousands of factoring companies out there who all say they can help your business. When you work with a seasoned factoring broker, you don’t have to do all the comparing and contrasting yourself.

Moreover, it’s a factoring broker’s job to find the best factoring company to meet their client’s cash flow needs. So tell your clients that working with a factoring broker will save them valuable time and money.

Keep these five Q&A’s in your back pocket every time you approach a business owner who is weary about factoring his/her receivables, and you will see your commissions increase in no time.
Nikki Flores Factoring Investor AuthorNikki Flores is a Consultant Liaison for PRN Funding, LLC, which is an extraordinarily focused niche player in healthcare factoring.

PRN Funding exclusively factors the accounts receivable of companies that sell goods or provide services to healthcare providers.

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