What is factoring?
Factoring, also known as accounts receivables financing, is a type of financing that involves a financing company purchasing your invoices. This type of financing helps propel businesses that don't qualify for other lines of credit, while helping you preserve full ownership of your company. Below are some of the most common misunderstandings about factoring and how it can help your business.
Myth #1: Factoring is only for companies that are struggling.
Many assume this because factoring relies on the creditworthiness of a company’s customers, not the credit score of the company itself. But, just like a loan from a bank does not discredit a business’s trustworthiness nor take away from its perception of success, factoring is not synonymous with financially weak companies.
While factoring is a realistic option for businesses who are struggling, any business that needs a reliable source of capital or is looking to grow at a rapid pace would benefit from the flexibility that factoring offers…so maybe we should begin to say that factoring is synonymous with flexibility.
The flexibility associated with factoring means quick and easy access to capital needed to quickly grow your business. Most factoring companies take the weight of waiting for invoice payments and subsequently provide your business with a timely cash advance. This is a flexible and fast alternative to traditional business loans. This means quick access to cash, and right when it’s needed.
Myth #2: Factoring is difficult.
Many companies have never factored their invoices before. So they worry that the process will be challenging or time-consuming.
That was the case for a new engineering firm that was referred to Catalyst. About learning how to factor the CFO of this company said: "Given that this is the first time in my career that I have worked with AR factoring, Catalyst Financial has made the process and subsequent accounting seamless." An experienced team will provide a clear process for your business. They will answer your questions in a timely manner and make sure that they work to meet your business's unique needs and financial requirements.
Myth #3: Factoring agreements require you to sell every invoice.
While factoring companies expect a consistent flow of invoices, most factoring companies don’t require you to factor each invoice. At Catalyst, we work with companies to determine what flow of invoices is expected. Customers who make up a large portion of a company’s business, or those who typically take longer to pay are the invoices that are typically selected.
Myth #4: Factoring companies pester customers.
Experienced factors realize that dealing with businesses financial matters requires professionalism and sensitivity to the business/customer relationship. A factoring company must gain permission to factor invoices, so it is in their best interest to treat your customers with respect.
Myth #5: Factoring is only a short-term solution.
Many companies want factoring as a short term solution, and it certainly can just be a step along the way.
However, there are certain businesses that greatly benefit from long-term factoring. We have clients who have factored with us for over twenty years to solve short- and long-term cash flow problems. It’s up to you to choose how long you’d like to use a factor.
Myth #6: Factoring agreements always lock you in.
Some factoring companies lock their clients into contracts that include fixed rates, termination fees and terms as long as two years. However, most reputable factors offer shorter, more flexible terms. It’s worth shopping around when selecting a factoring company. Most factors will offer lower fees and more competitive rates if a client signs a one-year agreement as opposed to a one-month term. Fees and rates can be adjusted as a client factors more consistently. At the end of the day, it’s all about providing a high level of customer service.
Ready to increase your cash flow?
Catalyst can provide assistance in a little as 48 hours by turning your accounts receivable into cash.