Monday, October 28, 2013

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 with any questions or comment you have on this post.

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