Invoice Factoring is a very well-established financing mechanism that essentially enables businesses to sell their invoices in order to access upfront cash that they might otherwise have been left waiting on for an extended period.
Factoring is typically used by companies as a form of cashflow finance that involves certain fees but which can be a vital lifeline during moments when margins are tight and time is of the essence.
Despite being widely used, the details of how factoring actually functions are often misunderstood and there are certain myths around the subject that can confuse matters still further.
Here’s a look at some of the most common misunderstandings or myths about invoice factoring.
It gives a negative impression to customers
It is natural that a business would want to handle all its invoice-chasing efforts in-house and only deal directly with clients but it’s wrong to assume that having a third party handle these processes inevitably makes a negative impression.
There are so many different reasons why a business might have cause to use factoring as a means of raising finance that the process is far from unusual and certainly isn’t always taken as a sign of financial difficulty.
There are onerous clauses in factoring contracts
The terms of a factoring contract are designed to provide clarity to all parties involved and to define the terms under which a particular deal is being done.
Providers of factoring services benefit from the arrangement by way of the fees involved but their aim is not to be any more onerous than is strictly necessary.
Big banks don’t do factoring
There are a wide range of different companies which offer invoice factoring services in the UK and around the world and they include dedicated units established by mainstream and traditional banking institutions such as the Royal Bank of Scotland and the Skipton Building Society.
Only companies with poor credit have factoring facilities
This simply isn’t true and there are thousands of companies with strong credit histories who turn to invoice factoring as a means of raising cash within an urgent timeframe every year.
If you’re running an SME it is easy to assume that your larger counterparts don’t suffer from cashflow crises but the reality is that they do and they often need quick access to cash through mechanisms like invoice factoring.
Factoring takes over the relationship with your customers
Using a factoring service brings a third party into the processes surrounding your invoicing of clients and customers but their involvement need not go any further than that.
Providers of factoring services have obvious reasons for pursuing recipients of your invoices for payment but no interest in impinging on your relationship with them beyond that in any way.
Invoice factoring isn’t right for every business or in every situation but it can provide precisely the kind of fast and flexible cashflow financing solutions that help thousands of businesses survive and thrive every year in the UK.