When I tell someone that I work for an invoice financing company, one of two things usually happens. About 30% of the time, I’ll receive a blank look because the person has never heard of invoice financing. I like these people because I can explain what we do at The Receivables Exchange and become their first impression of the industry. I can tell immediately if someone has heard of invoice financing when a slight look of distaste appears on their face followed by the question “you mean a factoring company?” I always respond with my usual “well, we’re similar to a factoring company but different in a few key ways.”
Somehow over its’ 800+ year history, factoring companies picked up a few bad habits. And as the years passed, those companies succeeded in bestowing an unsavory reputation on the entire invoice financing industry. In response, some invoice financing companies (including The Receivables Exchange) have sought to differentiate themselves from the bad habits of their factoring cousins.
Here are a few infamous factoring practices that have helped give the entire industry a bad name:
Factoring Gives Invoice Financing a Bad Name
1. In order to factor receivables, you have to give up all control. Some factoring companies have incredibly restrictive contracts that take advantage of small business owners’ need for fast cash. Many of them enforce a minimum and maximum on the dollar amount of invoices that can be factored each month; impose inflexible pricing and terms; and require that all eligible receivables be factored, regardless of need. Yes, small business owners get funding they need but at what cost?
2. Personal assets are not off limits. Many factoring companies require personal guarantees, all-asset liens, and restrictive covenants. Why do they do this? If your customer fails to pay an invoice, you are usually responsible for paying back the money you borrowed. Already spent it on payroll? That’s too bad. Factoring companies will go after personal assets if you can’t pay.
3. Your customers are notified of the factoring relationship and then pestered if they don’t pay fast enough. All factors (but not all invoice financing companies) notify your customers when you finance your receivables. And by using a factoring company, you are outsourcing your collections efforts. You have no control over how often or how aggressively your customer is contacted if they are slow to pay.
4. Fees, fees, fees, and more (hidden) fees. It is widely acknowledged that factoring can be expensive. It’s the price some people are willing to pay for almost instant cash – especially in this economy where the banks simply aren’t lending. Sometimes, small business owners are paying even more than they think for factoring services due to hidden fees (for software, collateral, and management, just to name a few) and rising discount fees tied to aging receivables.
5. Once you sign on the dotted line, you can’t go anywhere else for financing. The aforementioned all-asset lien prohibits many factoring customers from entering into any other financing relationships until the long-term contract is expired.
You have just read the worst of the worst; the things that many factoring companies don’t want small business owners to know. But there is good news too. Not all alternative financing and invoice factoring companies are bad. Not all of them impose inflexible terms, require personal guarantees, charge an unreasonable amount, or notify your customers of the financing relationship. In fact, most invoice financing companies truly want to help small business owners succeed and grow by helping them improve cash flow and build credit. It’s these companies that strive to remove the stigma associated with factoring. So, while there are a few bad apples out there, it IS possible for small business owners to find a financing company that understands their unique needs and can offer flexible financing solutions.
One non-factor financing solution? The Receivables Exchange. At The Receivables Exchange, we gain absolutely nothing if a small business defaults, we don’t notify your customers of the financing relationship, and we only impose liens on the invoices you choose to trade on our exchange. Visit our website to learn more.
This post was originally published on the Receivables Exchange. Find out more info on the Receivables Exchange and how to turn invoices into cash by using accounts receivable financing to generate working capital.
About the Author:
Mariah Courtney is the Online Services Associate at the Receivables Exchange, where she leads the social media marketing efforts of the company. Prior to joining TRE, Mariah was copywriting for WPromote Inc, the top ranked search engine marketing firm in the country. She has written websites, blogs, press releases, and articles for dozens of industries. Mariah is responsible for managing the Receivables Exchange’s various social platforms by developing, optimizing, and distributing social media programs and developing online relationships with customers and potential partners.