Sure, in the past, factoring was used by struggling companies. But now, many businesses use factoring as an anticipation of healthy cash flow and revenues. Nonetheless, according to Scott Winicour, COO of Gibraltar Business Capital, pessimistic connotations are still associated with factoring for two main reasons: cost and customer perception. However, if you dive into both issues, you can see that in today’s unpredictable economy, factoring should no longer be considered the “F-word” of funding choices.
Factoring has had the reputation in the past as being overly expensive. However, because of supply and demand, the reality is factoring costs have been on a steady decline since 2008. There really is an abundance of capital that would like to be working in the market, so today there are more factoring companies than ever before. This plentiful supply of factoring companies means lower costs as they compete for customers. In addition, the marketplace has become more efficient, allowing prices associated with factoring to be driven down.
Since the process of factoring generally requires that a business’s customer pays the factoring company directly, a business may worry that its reputation may be tarnished if its customers learn that it is factoring. The perception is that if a business has to sell its accounts receivable, it is financially stressed. While that may be true in some cases, most often it is not. In fact, big box retailers, including Wal-Mart and Home Depot, have staff dedicated to working directly with their suppliers’ factoring company. They know that suppliers are able to produce more finished goods when they can more quickly buy raw materials.
In addition, some factoring companies offer a confidential arrangement in that the customer is not notified of the sale of the receivable and the business collects the receivable on behalf of the factor. This is more common in places like the UK, but some US factoring companies are also trying the arrangement.
Despite the common misconceptions about factoring, it can provide a useful means of securing needed capital for thriving businesses.