Factoring Service Common Misconceptions

In a typical factoring scene, the client company derives invoices from its own customers for the goods and services it sold. It then sells the said invoices to a third party called the factor who in turn gives in advance a percentage agreed upon of the invoices’ value. Once the factor has collected the whole amount due from your client, that is the time that they will forward the balance remaining less of any fees and discounts. A lot of people and companies have misconceptions about the factoring service. This includes misconstruing it for a loan, thinking that it’s only available to established companies, its costs being very expensive, losing clients who discover that you are selling your invoices and many more. Below is a broader and more thorough discussion about these.

You should know that factoring is not a loan. It should be noted that it is different from discounting. With factoring, you sell your invoices while in the case of discounting you loan and use your invoices as collateral. The two produces similar effects like improved cash flow and increased working capital but they are two different financing means. This means that factoring does not affect the liabilities portion of your statement of financial position also known as your balance sheet. It does not increase your liabilities. Not even by a single centavo. Furthermore, it does not produce any interest which will be compounded monthly and would add up to your already long list of expenses
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Another misconception is that it is only available for large well established companies or for those who are in a terrible financial demise. Unlike the common bank loan, this type of funding does not rely on your credit score or financial status. Instead it looks into whether or not your customers will pay the invoices due them. It is also not solely for those who are experiencing downturns or are nearing bankruptcy. Even highly profitable businesses use this especially those who have long receivables like textile and clothing companies.

It is expensive. Certainly not! It is even far cheaper than bank loans. The fees or discounts you get are in an amount lesser than that which you would otherwise incur with discounting or bank loans. Remember no interests and no debts.

Also note that customers will not feel bad if you go into a factoring service. They will still pay the same amount and will still get the products or services they spent their money for.