Four Common Invoice Factoring Myths

Invoice Factoring is increasingly recognised as an important part of business finance, particularly for SMEs. It operates as a viable alternative to a traditional bank loan and helps to promote a healthy cash flow. However, there are a number of misconceptions that cause many business owners to hesitate before taking advantage of it. In this article I’ll clear up some of the most common Invoice Factoring myths.

Myth: Invoice Factoring is only for businesses that are having serious problems.

Reality: Invoice Factoring is a way of managing your existing cash flow more effectively. It isn’t a bailout, and in actuality is much better suited to companies that are performing well and looking to grow and develop. Invoice Factoring involves using your customer invoices as collateral in return for ready cash, which the factoring company will then make back by collecting on these invoices. It is generally popular with companies that have good relationships with their customers, but find themselves short of ready cash due to slow or staggered payments from customers. By managing their cash flow more effectively, they can then spend less time chasing invoices and more time developing their businesses.

Myth: Invoice Factoring companies take a huge cut of the value of your invoices

Reality: Most invoice factoring companies will give you up to 90% of the value of your invoices right away, and then return the remainder when the customers have paid. The cost deducted is a service fee that covers the management of the facility, calculated based on the projected turnover. In the case of a reputable invoice factoring company should typically be around 0.3-0.5% of your profit.

Myth: Factoring companies will harass your clients with aggressive collection calls

Reality: Factoring companies want to enable you to do more business, so it’s not in their interest to alienate your customers. They will often adopt a more professional and systematic approach to make the collection process simpler for all concerned. In other cases the client will barely notice a difference in how and when they’re paying for your goods and services at all.

Myth: When customers realise that I’m using a factoring company, I’ll lose business

Reality: Invoice Factoring helps your company to grow and develop, so an effective factoring plan can often be a sign that a company is doing well, rather than badly. However, some factoring companies are aware that this misconception exists and offer services that allow all communications to appear to be coming from you. They can also offer alternatives for companies that have particularly strong relationships with their clients and wish to maintain a face-to-face relationship.

Utilised correctly, Invoice Factoring can be one of the best ways for a company to grow and develop even in times of economic uncertainty. However, it is vital that you choose a trustworthy and reputable factoring company. Seek out established finance brands that are fully accredited before making any commitments and you should be in safe hands.

This blog post is sponsored by Hitachi Capital (UK) PLC, winner of the Factor and Discounter of the Year award at the CreditToday Awards 2011.

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