Why does Factoring send off Red Flags? A Popular Misconception..

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.

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.

Temporary Staffing is on the RISE

Temporary staffing can no longer be considered a temporary solution for businesses. It is become an increasingly popular method for businesses who do not want to have to lock in their employees for years to come. As a result, there is a steady increase in the percentage of contract workers in Canada. While not all businesses have adapted; here are some of the benefits that come with temporary staffing.

1. You can hire a specialized contract worker to complete a specialized project.
2. There is very little training required in most cases.
3. Most contract workers are not provided benefits.
4. Contract workers can be brought in during peak seasons and let go right when the contract is complete.
5. Productivity is higher because they are only brought in when the work load is strenuous.

The number of temporary employees continues to rise, as there were approximately 2 million people within Canada that were considered temporary workers (Statistics Canada). These numbers will continue to grow as businesses begin to adopt the new practice. Workers are also starting to understand the importance of working in temp positions because it expands their current skill-set as well as adding invaluable experience.

As much as there are benefits to having temporary employees, companies can end up losing highly qualified workers because they are offered full-time positions at another company. It is safe to say that the majority of the workforce is still looking for full-time positions, and a good amount can be considered valuable workers; so are these temp workers really the cream of the crop? Many will take temporary jobs because they are currently unemployed or are looking for another job. So why were they unemployed/unhappy in the first place? That’s one question managers will have to pry out of interviewee’s.

Regardless of the answer, temporary jobs will continue to grow in the market place as businesses look to maximize their working capital. That’s not to say that full-time positions will disappear; but over the past couple of decades, businesses and corporations have been looking for ways to remain competitive in their respective industries. Downsizing and outsourcing are two methods that come to mind when businesses are restructuring.

I’ll finish off here with a question; would the economy function adequately if the majority of the workforce were contracted?