Factoring: The Good, the Bad, and the Better

What’s a business owner to do when all of their capital is tied up in accounts receivable? While no one wants to be put in this situation, one of the options offered, for better or worse, is factoring. What is factoring, though, and is it good for the health of a business? Factoring is a way for businesses to access those funds tied up in accounts receivable, also known as invoices, by essentially selling them to a third party at a discount. Factoring can also be when one company purchases debt or invoice from another company.

Benefits of Factoring

Factoring is a quick fix way to get cash without having to wait through a lengthy bank loan approval process. It bridges the funding gaps caused by slow-paying customers, improving cash flow by allowing customers to have longer payment terms. Small and medium-sized companies who may not be able to receive a bank loan due to poor credit or limited operating history can also use factoring as a cash flow fix. This is because factoring companies usually only look at the invoice values, not the business’s credit or history. Additionally, factoring is considered unsecured financing, so it doesn’t require collateral, like real estate or inventory, that can be seized if the business fails to pay factoring fees.

Problems with Factoring

While factoring may seem like a simple solution to a cash flow problem, return value and factoring fees paint a different picture. After the factoring company collects outstanding invoices, the business may only receive as little as 80% of that total. Adding in factoring fees, service fees, credit check fees, etcetera further complicates what seemed like a simple solution. Another issue is that the factoring company will solely control unpaid invoices and communicate directly with the business’s customers about the particular transaction and paying unpaid invoices. This could potentially damage important customer relationships and hurt the company’s reputation permanently. And then there’s the issue of default or slow payment. If this happens, the factoring company could terminate the relationship with the customer, costing the original company its business. And if the original company itself wants to terminate its relationship with the factoring company, there could be a long-term contract in place, forcing the company to relinquish control of invoices for longer than desired.

Better Than Factoring

If factoring is so risky, what can a company do to bridge the cash flow gap? Payment and financing solutions like BlueTape are a convenient and improved alternative to factoring. With this kind of tool, building materials suppliers can access tools to offer financing for their trade customers at low risk while receiving payments up front. That means cash in hand without the pitfalls of factoring. Suppliers can avoid chasing unpaid invoices with automated invoice collection and text or email reminders. With BlueTape, suppliers get paid up front with net terms, replacing checks with quick ACH payments. And since no credit card is needed, suppliers will save money by gaining access to the lowest credit processing fees through the BlueTape virtual card. The BlueTape signup process is quick, easy, and paperless. Create an account today and start enjoying cash flow without the pitfalls of factoring. You can also book a free meeting with one of our team members.