Top 10 Myths About Accounts Receivable Financing – Part 2
Despite a long history as an effective form of alternative financing, accounts receivable financing is misunderstood by many business owners. As a result, these businesses may be missing out on an opportunity to access the cash they need to support a growing business.
In a previous article, we looked at five of the biggest myths about accounts receivable financing (or “invoice factoring,” as it is also known). In this article, we’ll examine five more myths that continue to cause confusion about what invoice factoring is and what types of businesses can benefit from it.
Myth #1: Factoring is “all or nothing”: You have to factor ALL of your invoices to qualify.
FACT: Not every factoring company requires businesses to factor all of their invoices. Some offer much more flexibility to allow the business to factor a small number of invoices. For example, AR Funding works with clients who have chosen to factor as few as 25% of their invoices.
This kind of flexible arrangement enables business owners to free up a small amount of cash to address a short-term cash-flow issue while minimizing the financing costs involved.
Myth #2: Working with an accounts receivable company means giving up control of your company.
FACT: Business owners maintain full control over their business operations when working with an accounts receivable financing company.
For many business owners, the thought of handing their accounts receivable over to a third party is a scary proposition, and that’s a natural reaction.
However, the business owner retains complete control of the business’s core operations, and they can continue to deliver products and services exactly as they always have. The only difference is that the factoring company will conduct due diligence around the credit-worthiness of the business’s customers and obtain independent confirmation on the delivery of products and services.
In terms of the invoice management processes, the business owner can choose to manage all accounts receivables or elect the factoring company to conduct collection calls and monitor the accounts receivable on their behalf. For example, the business owner may wish to manage most of the customer communications themselves or they may choose to have the factoring company take the lead. Either way, the business owner takes an active role in setting the terms of the engagement.
Myth #3: Accounts receivable funding forces businesses to lock into a contract for a year or more.
FACT: Many factoring companies require a minimum contract of 12 or even 24 months while others offer shorter, more flexible terms, so it’s worth shopping around. At AR Funding, for example, businesses can sign up for a term as short as 90 days. This can be very advantageous for businesses looking for short-term, bridge financing as well as those that have never tried factoring before and want to try the service without committing to a long-term arrangement.
When negotiating a contract with a factoring company, pay attention to the contract details to ensure that they don’t try to penalize you for minimum funding amounts, impose a lengthy notice period to terminate a contract, or require hefty cancellation fees for terminating a long-term contract early.
Myth #4: Businesses need to pay an up-front fee before they can factor their invoices.
FACT: While many accounts receivable companies charge an up-front, non-refundable administrative fee, also known as the application fee, others do not. These types of application fees are not an industry requirement, and business owners who are reluctant to pay a fee before finding out whether they qualify for the service can find factoring companies without these fees.
AR Funding, for example, does not charge an application fee. The only fees charged to the business are the hard costs of searches and filings performed on the business’s behalf as part of the onboarding process—and only after the business has applied and been approved.
Myth #5: Factoring companies use delaying tactics to maximize the fees they earn.
FACT: The reality is that factoring companies are motivated to process payments as quickly as possible.
While it is true that factored invoices incur more interest costs the longer the payment is outstanding, few factoring companies try to prolong the collection process to maximize the interest they earn.
In fact, most factoring companies have developed processes that streamline invoice management and collections and accelerate payment in order to manage their risk exposure, administrative costs, and ability to extend credit:
Risk. The longer an invoice ages, the higher the risk of non-payment, which means the factoring company is at increased risk of losing a portion or, in rarer cases, all of the invoice amount.
Cost. When an invoice takes longer to process, the administrative costs of servicing that invoice increase, and those costs can far exceed the interest gained.
Credit. If a business sells to a customer on a regular basis, the amount of credit extended to that customer rises as the overdue invoices pile up. This exposes the factoring company to additional risk, and can also restrict their ability to advance funds on subsequent invoices.
To learn the truth behind even more invoice factoring myths, read the Top 10 Myths About Accounts Receivable Financing – Part 1.