There are a few misconceptions going around regarding accounts receivable financing. New business owners can be misled by this misinformation, which sometimes ties them into debt-based agreements without fully understanding the receivable factoring process. We’ve compiled a list of some of the myths so we can clarify and help you make more informed decisions about factoring.
Myth #1: Factoring is the same thing as refinancing.
Factoring is not like refinancing. A business that takes out a loan is taking on debt and refinancing when a company is in distress can often be difficult. On the other hand, a business that has its accounts receivable factored is not taking on a new form of debt and is being analyzed based on its customers’ ability to pay outstanding invoices. Essentially factoring can be used to avoid adding debt and to improve cash flow when a company has unpaid customer invoices and doesn’t want to wait 30 to 90 days for payment.
Myth #2: Factoring Is for businesses that can’t qualify for a bank loan.
This isn’t true either. There are many businesses that can qualify for a bank loan and instead choose to take out a factoring agreement. As mentioned, factoring doesn’t require you to put more debt on the books to obtain cash. Also, the company is able to select the invoices it wants to factor and the approval process takes days instead of weeks or months with a bank loan. Factoring is for all businesses that want flexibility and a faster, less cumbersome approval process than a traditional bank loan.
Myth #3: Factoring requires a company to submit all unpaid invoices.
Factoring companies offer flexibility and allow businesses to select the invoices they want to factor. All invoices do not have to be submitted. While some factoring companies offer whole ledger factoring, this is not a requirement.
Myth #4: Factoring can impact your customer relationships negatively.
Some business owners think that they can’t approach their customers directly anymore if they have an accounts receivable factoring agreement. This is not the case at all. You will still be able to approach your customers the same way you always have. Factoring companies want to ensure you maintain a positive relationship with your customers and will contact them to verify invoice details and update the remittance address but never to harass them.
Myth #5: Factoring won’t work if you have bad credit.
Factoring is a good option even if your business credit score is low. An invoice factoring company reviews your accounts receivable to determine the terms it can offer. Factoring focuses on money that customers owe and how likely they are to pay on time. A business with limited credit history or bad credit will still qualify for factoring because the creditworthiness of your customers is a top consideration.
There are a lot of misconceptions about accounts receivable factoring. As you can see, many of these misconceptions aren’t true, and you shouldn’t let them be a detriment to your business. You can take this as an opportunity to look into the accounts receivable factoring process and see if it would be a good fit for your business.
Acquiring the capital you need to keep your business going doesn’t have to be extremely difficult. Porter Capital offers working capital solutions to businesses all over the country. Apply now to get a free quote.