Factors are loan sharks – Loan sharks charge rates of interest of a 100% or more. Factoring rates are nowhere near that level. Some merchant cash advance companies charge rates at 100% plus levels, but not factors. Factoring rates are more akin to credit cards rates. In fact, factoring is essential like using a credit card. People buy from you. The card company (factor) pays you. The customer pays the card company (factor).
Factoring is just a pay day loan – Pay day loans are based on your future work (next week’s check), i.e., cash for something you have not done yet (work). Factoring is actually the opposite. You can only factor if you have already done the work (i.e., sent the invoice). There is no “selling your future”. Factoring is the sale of an asset you have already earned.
Factoring is too expensive – If all your customers said they wanted to pay by credit card, would you have an issue with that? You pay a small percentage to Visa or MasterCard and them you have your money. That is exactly how factoring works. Factoring rates and credit card rates are very similar. The big difference is your customers don’t have a $100,000 credit card limit. Your factor will provide that.
Everyone says factoring is bad – My (fill in the blank) says factoring is bad and I should not use it. Quite frankly, most non-factoring professionals do not understand factoring. The very people who question factoring use a similar product on a daily basis every time they swipe their credit card. They are just unaware of the similarities between factoring and credit cards. Talk to a factoring professional and become knowledgeable about factoring before dismissing a viable option.
When you factor, customers think you are in financial trouble – Factoring is not the financing choice of last resort. It is the financing choice of that fits your company’s needs. For example, a bank will typically only advance 50 – 80% on receivables. If your customers ask (and most never will), let them know that in order to carrying their payables, factoring is the best solutions. Factoring is essentially B2B credit card financing. Banks will not sufficiently lend against customers’ receivables (their payables), but your factor will, because we understand your customers’ creditworthiness. Typically, you factor when your customer force you to wait, but you cannot wait to pay your vendors.
Factoring is only for small/larger companies – The decision to use or not use factoring has no relevance to a company’s size. If factoring is the correct funding solution, then size is not an issue. There are factors that will fund very small accounts and factors that fund large multi-million dollar accounts. It is the same as saying you are too big or small for a bank. You just need the right bank or factor.
Once you start factoring you can’t stop – They say factoring is a drug and once your addicted you cannot stop till you die. What they forgot to say is any funding plan requires an exit strategy. Whether you are factoring or using a line of credit from a bank, what is you long term funding plan? How are you going to pay off the bank line of credit, bank loan, etc.?
You should only factor your deadbeat/worst/slow paying customers – My first question would be why are you doing business with these customers? Let’s assume you have valid reasons for doing business with these customers. Factoring rates are like any other funding source. The quicker it pays, the better the collateral, the less the cost of funding. If you have 2 customers, one who pays in 15 days with great credit and the other who pays in 90 days and has poor credit, on which customer will you get the better rate?
Factoring will put you out of business – A factor cannot put you out of business any more than your bank can. You are still in charge of your business. You make all the choices, not the factor. Besides, what business wants its clients to die? This makes no sense. It is always in the factor’s best interest for you to succeed.