When it comes to invoice factoring, there is a lot of misinformation circulating. However, the experts at Thales Financial say that factoring your invoices can actually be good for your business, despite what you might have heard. Below are some of the more common myths that you may be aware of in relation to factoring invoices. This article will discuss why these are not true.
Factoring Should Only be Used as a Last Resort
It is true that invoice factoring is often used by companies experiencing cash flow problems, but that does not mean you need to wait until your business is in dire financial straits before using it. In fact, invoice factoring can be a terrific way to keep your own finances in good shape as it allows you to pay your invoices on time or even avail of early payment discounts from your creditors.
Factoring Will Harm Your Business Credit Score
The real truth is that factoring can help to improve your credit score rather than harm it. With improved cashflow, you can make your own payments on time rather than waiting for your customers to pay their bills. If your customers pay you late, then you are likely to be late paying your own invoices. This will have a negative impact on your score. When your business is seen to pay on time, or even early, banks and other lending institutes will look on it more favorably.
Factoring is Too Expensive
All forms of borrowing come at a cost, and invoice factoring is no different. Nevertheless, the short term nature of factoring means that you may end up paying less overall than you would if you were to get a loan with a fixed interest rate over several years. The amount you pay for factoring will depend on the contract you have agreed with the factoring company, but in most instances you will pay a fee that is a percentage of the invoice total. If you only factor your invoices for a few months to get your cashflow back on track, your borrowing costs will typically be considerably lower.
You Cannot Access Factoring without a Good Credit Score
While your business will normally require a healthy credit history and a good score to be in a position to apply for a favorable business loan, the same is not true of invoice factoring. This is because the factoring company will be checking how creditworthy your customers are rather than your business. So even if you have a new business without a good credit history, you can still access funding through a debt factoring company.
Factoring Invoices Will Harm Customer Relations
There may be some customers who are not keen on the idea of you factoring their invoices, but most will not have a problem with it. It shouldn’t make any difference to them and just means that when the time comes to pay the invoice, they will settle with the factoring company instead of your accounts receivable department. There is also a belief that factoring companies harass a business’s customers for payment, but this is rarely the case. The factoring company wants the transaction to go smoothly because it means there is a chance that the business will use its services again.
There are those that have a negative opinion of invoice factoring due to certain myths that they have heard. The reality is that factoring your invoices can be a wonderful way to improve cashflow and credit score. And far from harming customer relations, invoice factoring can show your customers that you are committed to your business and making it work.