|
 Fact: Yes, factoring is more expensive than some other forms
of working capital funding. However, it is important to compare accurately the
benefits and costs of this important tool for growth to other
options that your business might have. Many times, the blanket
statement that accounts receivable factoring is too “expensive” is often a
response given when a prospective has not yet looked at the
benefits of factoring and or does not yet have a complete set
of details. In fact, the costs associated with invoice factoring are
quite competitive, compared with other financing options that
the client has realistically have available to them.
When analyzed objectively, factoring is simply another form of
funding that an entrepreneur has available to grow their
enterprise. Funding from a professional factor should not be
compared to a line of credit at a bank or similar tools, due
to the fact that funding provided through factoring is not a
loan. Professional fees are not considered as interest, it is
a purchase discount. The technical definition of factor is as
follows: As a verb, to factor is the act of buying or selling
accounts receivable at a discount. As a noun, a factor is a
company engaged in the buying of accounts receivable.¹ As a
result, attempting to multiply a factor’s professional fee and
annualize it for comparison to a line of credit is well
intentioned but inaccurate and misleading. This assumes, of
course, that you could secure a line of credit in an equal
amount at the outset; which is usually not the case.
In essence what receivables factoring allows you to do is to convert [at
your election] an invoice issued with terms granted [often 30
to 45 days, many times ignored by your client] to a “cash on
delivery basis”, or COD. Once the invoice is paid, a
discounted amount is accepted by you as payment, taking into
account the professional fees assessed by the factor.
As a result, your decision rule to use the funding and other
services of a factor is quite simple: will I be able to
profitably grow my business, if I had a consistent stream of
better cash flow? If the answer to this question is yes, than
factoring as a tool makes economic sense. If not, then it
makes little sense to enter into a relationship with a factor
to assist in the growth of your enterprise. It is very
important to complete this analysis before you enter into an
Agreement for funding with a factor, or other potential
partner.
In most cases, a business can prosper with better cash flow.
On the other hand, it takes much more than just working
capital and cash flow to
successfully run a business, regardless of the size, product,
service, location or complexity of the enterprise. No funding
source should ever make a claim that simply because you
factor, you will be more profitable or successful. The amount of
the incremental profit you could potentially make depends on a
myriad of issues to consider: knowledge of your industry and
business, your organizational and entrepreneurial acumen,
gross and net margin on the product or services you market,
and some items out of your control [economic conditions,
industry dynamics, etc.]
¹www.factorfunding.com/newsinfo/glossary.htm |
