Overcoming Cost Objections to Factoring

We recently received this query from a factoring investor subscriber:

“In the past, prospective clients complained about factoring costs being very expensive. How do we overcome this objection?”

There are several ways to address the cost question as explained here by Mike Ponomarew.

In my opinion the “Cost” question comes up if the Factoring definition and process is not thoroughly understood by the prospective client. It is important to explain to the prospect that:

  • factoring is NOT a loan,
  • there are NO liabilities created on the balance sheet, and
  • there is NO interest charged

 A Factoring facility is transactional based, which means each individual invoice is purchased at a discount.   This is similar to offering a cash discount or early pay discounts (2% 10/net 30 days) to a customer. Once the invoice is paid by the customer and the Factor deducts the discount fee from the reserve, that financing transaction has been completed.

The business is often tempted to multiply that factoring fee by 12 months because individuals are programmed to think about annualizing rates. This is easily demonstrated not to be the case by explaining as follows:

If a company expects to generate 25% gross profit, at the end of the fiscal year this company’s expected gross profit margin is still 25%, not 25% x 12 months = 300% gross profit.

I have encountered situations when I would actually explain this example to get my point across. If the prospect continues to persist our factoring fee is an interest rate try using this strategy:

Ask the prospect what their gross profit margin is i.e. 30%. I then multiply the 30% x 12, which equals 360%. Then you multiply the factoring fee i.e. 2.5% for 30 days x 12 this equals 30%. Subtract the 30% from the 360%, which leaves 330% left over as a gross profit. This demonstrates to the client that they are receiving less, similar to a cash discount, but still generating a healthy gross profit.

Inevitably, you will hear the prospect comment, “This is not how business or my gross profit works. I only gross 30% profit!” Exactly!  This example demonstrated to the prospect their business is transactional based and so is the Factoring facility.

Here are a three more points that you can use when trying to answer the  “Cost” question.

  1. Factor just the quick paying customers. The fees would be less and the reserves would be paid back quicker. Clients automatically think about factoring their worst paying customers, which incurs a higher fee.
  2. If the prospect’s company can sustain the time and cash flow, consider delaying factoring invoices for 15 or even 30 days which would reduce the fees. The clock starts to tick in respect to fees only when the money leaves the Factors bank account – not from the date of the invoice. Using this strategy the prospect can convert their customers into 30 days payers (if they traditionally pay in 60 days). Millennium can factor invoices up to 30 days old and in some cases a little longer
  3. To minimize costs only Factor the amount of invoices that will resolve issues. Avoid factoring invoices unless necessary to raise capital by receiving an immediate cash advance.

Contributing writer  Michael Ponomarew  brings with him more than 24 years of experience in entrepreneurship, marketing, and business management.  Mike can be reached at  mikep@millenniumfunding.com or by calling  888.652.8298 ext. 45.  

Comments

  1. I am just starting in this business and looking to grow the business. what do you guys do? are you factors and or do you sell ways to grow the business. I have an oppoutunity to grow this business but I need to find ways to do it. I have a financial background as I have been in the mortgage business for over six years and sales for the past 27 years.

    Please get back to me or send me a phone number to contact you.

    Thank you in advance.

    steven Egert

    • Fred Rewey says

      Hello Steven. FactoringInvestor.com helps keep Factors (Funders) in touch with consultants as well as provide materials to help consultants build their business. Check out the Free Articles, Webinars and Bookstore!