Factoring has often been known for being the financing that has been around for centuries, funds for dying businesses, or sometimes thought of as expensive working capital. It is true that factoring in some form has been around for hundreds or possibly thousands of years and that throughout those years some businesses that are suffering have utilized it for cash flow. But is that really what factoring should be known for? Is it still expensive? Is factoring still relevant today?
Does factoring still benefit businesses today?
Unquestionably, yes! Factoring is still relevant! More than that, It provides growth and operating capital for businesses at far less cost with many benefits. The fact accounts receivable factoring has been around for hundreds or thousands of years in some form in no way takes away from its relevance today. If anything, it only proves the benefits of it as it has stood the test of time. The reality is that factoring has evolved over the years to become a product that is even more tailored to the businesses utilizing it for financing. Factoring companies have put much effort into simplifying the onboarding process through online applications and e-signing of documents. In addition, there are 24/7 online comprehensive reporting systems, dedicated account executives, and a host of other value-added services that factoring companies bring to their clients. Not only have the services and workflows improved, but the costs have come down significantly over the past 10 years. In the past, fees would often start at 5% or so of the invoice value. Now, regular fees are starting at less than 1%. Cutting costs, reducing onboarding friction, improving client visibility and making work flow easier for the client has continued to make sure that factoring is still very relevant today.
What is the cost of factoring services?
We realize that the cost of factoring has come down significantly, but what is the true cost to a business looking to factor their accounts receivables? Well, the reality is the cost of factoring is based on a number of things. Such as, how long a customer takes to pay a factored invoice, concentration of risk among a factoring clients customers, credit quality of a business’s customers, volume of business being done by a factoring client and a huge piece being which factoring company a business chooses to use. The typical cost of factoring runs between 1-3% of the invoice value. But there are many things to take into account. Are they charging me any other fees? Are there any upfront or due diligence fees? Is there an interest rate and do they have required minimums? Make sure you can get a clear understanding of the different fees involved.
What will my clients think?
Factoring is a widely acceptable practice today in the business world. But many business owners feel they would not want to utilize invoice factoring due to the fact that their customers would be notified that they are using the service. They feel that their customers may see this as a sign of weakness and potentially be harmful to the relationship. Though there may be some rare cases of this, the vast majority of the time this is a finance option that is widely accepted and in many cases encouraged. The reality is that most of the time businesses are looking for working capital it is due to business growth, and if your client knows this they are very unlikely to question utilizing the service.
Strategic benefits of Factoring over other financing?
Each form of financing has its own pros and cons list but factoring has a compelling list of strategic benefits over other traditional types of financings.
- Less risk – Factoring has some key elements that really reduce risk for a borrower/seller. Often factoring companies will buy credit insurance, so if a customer goes bankrupt and is not able to pay, there is insurance in place to protect a factoring client. Also, if the factoring arrangement is non-recourse, the risk of the debtor not paying is transferred to the factoring company. Another point that helps reduce risk is that the funds that you are receiving are based on outstanding invoices that will be paid. The factoring client is not going into debt and is not borrowing too much only to have repayments cripple their business.
- Room for growth – Since factoring is almost entirely based on the quality of the invoice and the ability of the customer to pay the invoice, it is quite simple for a factoring company to extend an increased amount of funds as sales increase. This works great for companies in staffing, transportation, manufacturing and many other B2B or B2G businesses as it gives them the ability to grow as fast as they can sell and fulfill orders.
- Time to get set up – Many forms of financing can take months to get set up through traditional banks. In most straight-forward cases a business can receive their funding within the first 5-10 business days after submitting an application to a factoring company. This allows business owners to jump on the opportunities they have and take care of needed expenses.
Factoring has never been more relevant to growing businesses in the U.S, Canada and across the world. If you have any more questions, please reach out to anyone on our team or fill out our online application today to get started at www.merituscapital.com/apply.