Factoring
is still a relatively new financing method within North
America , and business owners still do not understand what
factoring is. While it is a popular and accepted practice in the UK , it has been slowly growing in the United States and Canada . As it becomes more
increasingly difficult to get approved for a business loan, many entrepreneurs
are left in cold with very few options available. This is where factoring may
be the best solution to help free up cash flow while payments are being made. In
this blog I will attempt to educate not only business owners, but all
individuals who do not fully understand what factoring is.
By Definition;
factoring is a financial transaction where the business sells its accounts
receivable to a factor at a discounted rate. Businesses use factoring to
improve their cash flow so that they can use the working capital to pay off
expenses and continue to grow the business.
Here are some of the concerns that have been raised by
business owners:
1. Business owner to supplier relationship; many business owners choose their suppliers based on the relationship they have with them. It is no secret that business owners become more sceptical when they find out that their supplier is now using a factoring company to chase their bills. They see factoring as a weakness rather than an opportunity to expand the business. But in reality, factoring is a very quick source of financing that basically gives business owners access to cash that will eventually be theirs.
1. Business owner to supplier relationship; many business owners choose their suppliers based on the relationship they have with them. It is no secret that business owners become more sceptical when they find out that their supplier is now using a factoring company to chase their bills. They see factoring as a weakness rather than an opportunity to expand the business. But in reality, factoring is a very quick source of financing that basically gives business owners access to cash that will eventually be theirs.
2. Business owners believe that their customers might leave
if they find out they’re factoring. This is one of the most difficult obstacles
for entrepreneurs to overcome; they are so worried that factoring will scare
their customers and lose out on business. While there may be a few owners that think
this way, large corporations deal with factoring company’s everyday because
they understand the financial stress of 60 day credit terms. And if businesses
are THAT worried about having a factoring company call their customers; non-notification
is an alternative where the customer would never know.
3. Interest rates; while factoring receivables is more
expensive than a bank facility, it is meant as a short term solution when cash
flow becomes tight. If you are only factoring in 3-6 month intervals, the
interest incurred over that period is not significant. Most businesses that use
factoring services do so until they are approved for bank financing. Factoring
companies are not in the market to compete with financial institutions but
instead partner with banks when they are not approved for a line of credit.
Let’s not forget, while most Canadian banks do not have a
factoring department (National Bank of Canada being the exception), they
do provide ABL (asset-based
lending) services. While these services are being applied in a different
process and at lower rates, the mechanics are essentially the same. While
factoring continues to gain acceptance in the North American culture, it is
important for business owners to be open to the idea of working alongside and
with factoring companies.
Feel free to send me an email at mwong@ablebusiness.com with any
questions or comment you have on this post.
