May 27, 2024


Built General Tough

Common Misconceptions Associated With Factoring

Factoring is an important tool that accelerates cash flow by selling invoices to a finance company specializing in particular transactions. The process enables companies and businesses to get the necessary cash to conduct their various processes, such as settling employees’ payroll and handling expansion procedures. Business Factors and Finance provides several kinds of invoice factoring, including recourse and non-recourse factoring. The process works efficiently to ensure businesses get the necessary liquidity though it has several misconceptions which tend to mislead individuals. Some of the misconceptions include: 

Factors are lenders

Separate from lending, factoring doesn’t increase the business’s leverage and requires no long-term commitment. On the other hand, loans increase a business debt burden and require interest payment, affecting the company’s cash flow for several years. Invoice factoring relies on the credit score of the business customers and requires very little paperwork. Resource factoring is like a short-term loan, whereby after a specific period, the factor becomes unable to collect on the invoice, which then gets charged back to the client, who then decides to pay it back or replace it with a new one. The non-recourse factors are where the factor purchases the receivables with no chargeback if the invoice factoring cannot collect. 

Factoring is more expensive than a line of credit

Factoring isn’t expensive as it depends on the business arrangement with the factoring company. For example, in a recourse arrangement, the fees come lower than the non-recourse since the factor takes on less risk. Also, the fees and rates vary for certain businesses with a lower probability of the invoices not getting paid. Some businesses that attract lower invoice factoring fees and reserve rates include trucking or staffing companies that attract a higher advance rate than retailers. It is also important to identify that factoring doesn’t place restrictions on proceeds use and requires no compliance with covenants that restrict acquisitions, debt and mandating financial performance. 

Invoice factoring companies are collection agencies

Invoice factoring companies are not collection agencies since they only help businesses manage the advanced invoice collection. The factoring companies can’t act as collectors for business clients who default on their invoices. Before factors agree to buy invoices from businesses, they do a thorough credit check to determine their capability to pay for the invoices. After this, they decide if they would agree to advance part of the invoice to minimize the invoice factoring non-payment risk. 

Factoring companies are last resort financiers.

Factoring companies is not a lender of last resort though it could play that role for distressed companies with no other option. Also, most business owners benefit from using the invoices sitting around for months to help them grow their business. Additionally, to collect revenue, factors offer several back-office services such as invoice preparation and processing, which further helps the businesses to get cash quickly. Factoring companies help businesses s great deal depending on the nature of their agreement. The process has enabled businesses to get the necessary cash flow despite the various myths surrounding factoring.