Addressing Factoring Misconceptions
Because of its roots in the historically volatile apparel industry, factoring was once a controversial source of financing. However, as factoring expanded its reach to a wide swath of other industries over the past decade, it is now a vital and dependable resource for both start-ups and established businesses. In 2012, worldwide factoring A/R volume exceeded $2.1 trillion—$180 billion of that in the United States.
A commonly held impression is that companies choose a factor because they are not credit-worthy enough to deal with a bank. While it is true that factors often welcome in companies that banks reject, there is no added risk. Banks focus on a business’s creditworthiness, while a factor looks at the financial soundness of a business’s customers. This distinct difference allows factors to purchase the invoices of start-ups and firms with scant credit histories.
What does it cost?
There are two costs involved in factoring:
- Factoring commission is quoted as a percentage of factored volume and is based on these variables:
- Factored sales volume
- Average invoice size
- Term of sale to your customers
- Quality of customers
- Interest charged on advances against receivables, if applicable
The interest charge is competitive and comparable to any short-term revolving credit agreement. Interest is charged monthly at a rate tied to major interest rate indices based on your actual daily loan balance during that month.