Accounts Receivable Financing: 4 Big Misconceptions
A company’s assets can become tied up in accounts receivable that will be eventually paid in good faith. Except sometimes, companies need cash flow now and not in 90 days. Accounts receivable financing is a legitimate strategy for converting credit to cash without adding on more debt. Unfortunately, the following four misconceptions turn so-called factoring into a dirty word.
Factoring Is like a Loan
Unlike loans, accounts receivable financing involves an outside company buying customer invoices at a discount. The factoring company is therefore more concerned about the customer’s credit and not the company’s. As a result, there is significantly less paperwork, no new debt and certainly no interest for the cash-strapped company. All that changes is for a small fee, the factoring company becomes responsible for customer payment instead.
Factoring Raises Red Flags of Instability
If a customer’s account is factored, the customer will be notified by letter and instructed to send the payment to the new address. Many companies hesitate using factoring as a legitimate way of raising cash flow in the short-term for the fear of warding off customers in the long term or signaling that the company’s finances are in turmoil. This is simply not the case. The idea that only failing companies resort to factoring is a deep-seeded notion, and holding onto that misconception can shut companies off from a useful resource. Factoring opens up cash flow for growth and expansion, which is a sign of robust financial health. Also, the factoring company will not behave in a way to scare off customers for the very same reason why nobody does: Customers will take their business elsewhere.
It Is Not Sustainable
When factoring, the company will receive less cash now than if they waited to be paid directly by the customer later on. If the same account is factored consistently over time, this difference accumulates. However, this perceived loss should be weighed against the long-range benefits of increased revenue due to the growth afforded by funds available now.
It Is Only for Certain Companies
Factoring invoices allows any company to convert any amount of customer credit into cash flow for immediate needs or plans. Companies, from start-ups to international corporations, benefit from this flexibility. In fact, companies can rely on factors when a loan is not available or appropriate.
Factoring Increases Cash Flow Overnight
This one is true. If a local business wants to expand into new markets or an established company needs to update equipment, accounts receivable financing can open up the necessary cash flow within 24 hours. Factoring offers companies the flexibility to continue to offer customers credit options while still meeting immediate costs. With this flexibility, a company can enjoy growth with less risk and without more debt.