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One of the biggest objection I hear about Receivables factoring is that it is much more expensive than bank loans. When I hear this complaint, my first reaction is to tell them that if a bank loan provides an adequate amount of working capital for their needs, they should go that route. But if the bank rejects their application for funding, they should have an open mind about invoice factoring
There are several reasons why comparing factoring to bank loans is like comparing apples to oranges :.
- First, factoring is not a loan. You’re not borrowing money. Rather, you have to sell non-productive asset for a discount for immediate cash. Because, it is difficult to compare Factoring discount fee to bank interest rates.
- Second, set up an account Factoring relationship is simple and quick process. Funding can occur as fast as one week of receipt of the application. Compare that to usually long and often difficult process of getting a bank loan. Even in the best of times, you must provide the bank with a lot of historical information, answer a lot of questions, and wait a long time to get approved by a loan committee. With the current chaos in the credit markets, the requirements are more stringent and difficult. Factoring offers immediate cash flow after the relationship has been established with funds wired into your bank account within 24 hours of receipt of accounts …
- Third, offer many more aspects of business services that banks do not provide. For example, if you want to add a new customer accounts, the factoring company will provide credit screening free of charge. Groups can be made by employees in factoring company in a professional and courteous manner, which tends to reduce bad debt. Timely reports are under constant review, which will help the client keep a close watch on their outstanding receivables.
- Fourth, require Bank loans most always personal guarantees from the owners of the company and they are often called other collateral. Factoring companies need only the first position in the business-to-business accounts. No personal guarantees are required and no other assets need to be pledged. This arrangement not only gives the client the working capital it needs. The amount can be calculated only limited by the pool of receivables.
- Fifth seed companies have a very difficult time getting financing in these times of tight credit. Not so with the elements. As long as you’re selling to credit-worthy customers, a start up company should be able to account for factors
In short, companies that have been denied for traditional financing should not get hung up on cost factors. On the contrary, they should be more concerned with the cost of using this alternative form of financing. In other words, they should look at the opportunity cost.
Say you’ve got a potential new customer is ready to place orders with you, but you do not have the capital on hand to produce the products they need. If you can use factoring to provide the cash flow necessary to pay labor, purchase materials, and the costs, the company would come out ahead? Using incremental benefit analysis is something I strongly encourage business owners to do to determine if invoice factoring is a good fit for their company.
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