Getting rid of The Myths of Receivables Factoring

Getting rid of The Myths

Factoring volume exceeded $112 billion in volume in 2005, which represented a 9.3% increase over the prior year, many decision makers tend to either employ other methods or choose not to go after additional financing to grow their business. If a company is either in a high-growth mode or is experiencing serious cash flow issues and is not able to establish a working line of credit with a bank, why wouldn’t they turn to factoring? There are three main concerns and objections that many decision makers have that can be overcome with educating the customer about the product.

Expense

In general, factoring probably isn’t a good option for those types of companies. Factoring fees can range anywhere from 2% to 4% per month depending upon several variables, including average dollar amount per invoice, credit standing of the debtors, and the average time it takes to collect the receivables. If a company enjoys the size of margin that can easily cover the factoring fees, it makes perfect sense to employ this type of financing, rather than lose and forgo incremental profits market share to a competitor.

Customer Perceptions

At the inception of a factoring relationship, each account debtor is notified that a secured party (the factor) has taken title to invoices in which they owe payment. The letter also states that all future and present invoices due must be paid directly to the factoring company until otherwise notified by the factor. Factors only interact with customers on a random basis, mainly at the inception of the relationship.

Several large companies such as Walmart, Costco, and Target, have internal divisions within their accounts payable department to work with those vendors who factor their receivables. Should a customer who is unfamiliar with factoring question the notice and ask what is going on, the owner or manager only needs to tell them they have chosen to use a company to manage and finance their accounts receivable.

Losing Control over Receivables

If a company is either in a high-growth mode or is experiencing serious cash flow issues and is not able to establish a working line of credit with a bank, why wouldn’t they turn to factoring? At the inception of a factoring relationship, each account debtor is notified that a secured party (the factor) has taken title to invoices in which they owe payment. The letter also states that all future and present invoices due must be paid directly to the factoring company until otherwise notified by the factor. It would be counterproductive for a factor to be overly aggressive in collecting receivables and risk alienating the customer base. Factors typically work hand in hand with the client to collect receivables and oftentimes allow the company to make collection calls.

They would likely take a look at how it could help expand their business if more decision makers were educated about the benefits of receivables factoring. Traditional lenders can’t always provide the solutions, so it makes sense to keep an open mind to alternative forms of financing.

Some people feel that allowing a factor to collect their receivables takes control away from them. It would be counterproductive for a factor to be overly aggressive in collecting receivables and risk alienating the customer base. Factors typically work hand in hand with the client to collect receivables and oftentimes allow the company to make collection calls.

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