10 Common Myths & Misconceptions About Invoice Factoring

Common Myths and Misconceptions About Invoice Factoring

“Beware of the half-truth,” as the saying goes. “You may have gotten hold of the wrong half.” While the quote is certainly appropriate in many situations, it hits home a common issue experienced by small businesses looking for business funding and myths about invoice factoring. Many “facts” you read are half-truths, and some don’t have a grain of truth to them at all. So, if you’ve been looking for business funding, no doubt you’ve found more than your fair share of “half-truths” about getting funded from invoice factoring as well. Below, we’ll break down ten of the most common myths and misconceptions about invoice factoring, so you can make an informed decision about what’s right for your business.

Myth 1: You can only qualify if you factor all your unpaid invoices.

Many business owners shy away from invoice factoring services because they’ve heard that they need to factor all their invoices or all invoices for a specific client. There’s no truth to it at all.

Truth: Each invoice factoring provider is different, but most offer flexible terms.

Generally speaking, factoring companies don’t tie you down. You can factor a single invoice and then never factor again, factor all the time, or anything in between. 

Myth 2: You have to pay fees upfront before factoring your invoices.

If you’re facing a cash flow shortfall, paying upfront fees may be totally out of the question and prevent you from seeking funding altogether.

Truth: The fee is covered when your customer pays their invoice.

When you work with an experienced factoring company dedicated to service like Charter Capital, you don’t pay any upfront fees. Instead, you receive most of the invoice’s value as an advance. A nominal fee for the service is taken when your customer pays its invoice, and the remaining portion is sent to you. That means you’re never out-of-pocket anything under a typical arrangement.

Myth 3: Factoring companies delay the collection process to maximize their fee income.

Think of it this way: the factoring company only thrives when your business is successful. The more you can put into your business and the more you grow, the more they stand to make by retaining you as a client. It’s in the factoring company’s best interest to minimize collection delays and keep you well funded.

Truth: Factoring companies accelerate payments.

Often, factoring companies go above and beyond to accelerate payments by making it easy for your clients to pay by offering them a flexible solution and helping you manage your back-office processes more efficiently.

Myth 4: Using an accounts receivable financing or factoring company is more expensive than traditional bank overdraft financing.

True, factoring companies may cost more than conventional bank financing. However, funding from invoice factoring is designed to give you much greater financial leverage than you could ever gain from a conventional banking relationship.  The amount you pay for invoice factoring is typically based on the level of service you require from the factoring company in order to meet your business needs.

Truth: Factoring is an affordable source of business funding.

At Charter Capital, some of our factoring rates are as low as one percent. However, if cost is your primary concern, it’s best to start with a complimentary rate quote.

Myth 5: Customers might leave if they see you partner with a factoring company.

Small businesses are built on relationships, so, understandably, many business owners would worry about perception. Thankfully, that’s rarely a concern with factoring. Particularly in this day and age in which your business customers are accustomed to third parties like factoring companies performing treasury management services for their vendors, like you.

Truth: Customer invoices are managed much the same way you would with a bent on helping you provide better customer service.

Streamlined billing and more generous payment terms to your customers are seen as a benefit by customers. Moreover, businesses that leverage factoring are able to offer more flexible payment terms and can often take on more work, which leads to better service overall. This ultimately builds better customer relationships for your company.

Myth 6: I won’t qualify for factoring because of my credit history.

Most forms of business lending have stringent requirements related to your credit history, time in business, and cash flow. Factoring is different.

Truth: The creditworthiness of the business paying the invoice is the primary consideration. Most business owners qualify.

When you work with a factoring company, they’ll look into the creditworthiness of any customers whose invoices you wish to factor, and then determine if that business is creditworthy and how much credit can be reasonably extended.

Myth 7:  Factoring invoices means you lose control of your company.

Given the way approval works, business owners sometimes take a leap and assume that factoring means they can’t choose who to work with or which jobs to accept.

Truth: Invoice financing can give you more control over your company by helping you stabilize your cash flow.

For argument’s sake, let’s say your factoring company tells you that one of your clients doesn’t have strong enough credit for their invoices to be factored. You can still accept work or orders from them. You simply might not be able to factor those particular invoices. But, that would mean you’re extending credit to a high-risk customer—someone you know may not be able to pay. Most business owners wouldn’t do that unless under extenuating circumstances. Some factoring companies like Charter Capital will go out of their way to understand those circumstances and arrange to accommodate your funding needs accordingly.

At the same time, factoring stabilizes your income. You’re less likely to have customers who can’t pay, and your income becomes far more predictable. That leads to easier budgeting and provides an edge when you’re strategizing your next business move.

Myth 8: Receivables factoring is only for struggling businesses.

One of the most significant benefits of factoring is that it provides business funding when a business is otherwise denied a bank loan. You can qualify with bad credit, a short credit history, or even if your existing debts or excessive/rapid growth prevent you from qualifying for the loan you need. That sometimes leads people to believe that only companies in financial distress use factoring.

Truth: New companies and SMEs often use invoice factoring too.

According to the annual Small Business Credit Survey, a whopping 30 percent of businesses with financial needs don’t even bother applying for loans because they’re debt-averse, don’t think they’ll qualify, or for other reasons. Of those who apply and qualify, only about half receive the amount of funding they need. In addition, high-interest rates, unfavorable repayment terms, and insufficient funding amounts cause 20 percent to walk away from loans on their own.

While it may be true that it’s notoriously difficult to get a bank loan, these figures signify that about half of all financially sound companies still can’t get the funding they need—cash for growth, expansion, and everyday expenses.

Myth 9: It can take too long to see the benefits of factoring.

People who don’t understand how factoring works or how to leverage it properly sometimes think it’s a lengthy process because the business factoring needs to be approved, and the company paying the invoice needs a credit check before cash is disbursed. 

Truth: Factoring is designed to help with short-term cash flow issues.

First, it’s important to note that the steps outlined above—approval, credit check, and payment—all happen very quickly when you work with an experienced factoring company and you have basic business documents ready. From start to finish, everything can be completed in a couple of days. When you work with a company like Charter Capital, you can get same-day funding on the day you submit your invoice too. None of this is possible with traditional bank loans.

Secondly, factoring is designed to help with short-term cash flow issues like not being able to meet payroll at the end of a month. It’s a cash flow accelerant that reduces the time between completing work or delivering goods and getting paid.

Myth 10: Other business lines of credit or traditional bank loans are better.

Business lines of credit and bank loans are very different from factoring, so the benefits and use cases will also be different. Bank loan rates will often be lower, but traditional banks leave a major funding gap that factoring fills. Plus, factoring helps in ways that banks can’t or don’t.

Truth: Factoring is a better solution for many small and midsize businesses.

Factoring may be the better solution for you if you:

  • Need fast approval.
  • Want same-day cash.
  • Need flexibility
  • Won’t qualify for a bank loan.
  • Are a fast-growing company and need greater financial leverage/ funding than a traditional lender can approve.
  • Don’t want to take on debt.
  • Appreciate a streamlined back-office solution.

Work with the Best Factoring Company: Charter Capital

With decades of experience in the industry, fast approval, and same-day funding, Charter Capital can get your business the cash it needs through invoice factoring and dispel any myths about invoice factoring. Request a free rate quote now.

Co-founder and Executive Manager at Charter Capital with a history of 28 years working in the financial services industry. Skilled in Cash Flow, Leveraged Finance, Factoring, Mergers & Acquisitions (M&A), and Structured Finance. Strong business development professional with BA from The University of Texas at Austin and MBA of International Business from University of South Carolina.