Term requirement: Locks your company into factoring a certain amount of your invoices (often all of them) through the factoring company for six months, a year or even longer. As a factoring client, it’s crucial that you, the small business owner, understand the terms and jargon associated with a typical factoring contract. Drawback #1: Confusing contractsįactoring contracts can be very confusing, sometimes by design. Requesting and interviewing company referralsįactoring companies, however, typically work with small businesses and entrepreneurs in a faster, less structured way - but with the following major drawbacks. Banks follow specific steps in reviewing loan applications, including: It’s important to keep in mind that a traditional factoring company operates very differently from a bank. You might be wondering: Is invoice factoring a good idea? For many business owners, invoice factoring has an unsavory reputation as “the payday lending of business financing.” That’s because long-term factoring contracts often come with confusing terms, sky-high factoring fees and the risk of interference in customer relationships. Three significant drawbacks of invoice factoring In many cases, fintech factors are trying to create an entirely new approach to factoring. They leverage technology to gain an edge against traditional factors. These financial technology companies are typically industry-agnostic. While traditional factors advertise fast payments, the amount of paperwork involved in transactions can often bog the payment process down. These brick-and-mortar providers usually focus on specific industries, such as the garment industry, temporary staffing, trucking and manufacturing. Generally, though, there are two types of factors: Also, there are thousands of invoice factoring companies, so the sheer number of options can easily become overwhelming for business owners. This allows factoring clients to build cash flow instead of waiting 60 days or longer for customer payments.īut the factoring industry is filled with inefficient processes and even predatory providers. Factors typically advance 80% to 90% of invoice totals, so it can seem like a quick, easy solution to meet cash flow challenges. Invoice factoring is a process in which a financing company, often called a “factor,” advances cash based on uncollected invoices. In this post, we’ll cover key problems with invoice factoring and explain why early payment programs are a superior alternative to consider when you need to improve your cash flow. However, there are also a number of issues to consider. At first glance, invoice factoring may seem like an attractive and fast way to increase cash flow. It isn’t because traditional lenders are against financing small businesses, but rather, because most have labor-intensive lending processes, with rigid qualification requirements that are unfavorable to small businesses or even completely out of reach.Īs a result, many small and mid-sized businesses find themselves considering alternative financing options, such as invoice factoring, to bridge the gap. This has created a void between the demand for traditional funding options, such as asset-based loans and bank lines of credit, and the funding actually supplied.Ĭapital is difficult for small and mid-sized businesses to access for several reasons. In fact, in a Small Business Credit Survey, 52% of respondents indicated their financing requests were unmet or the sum they received fell short of their needs. However, small and mid-sized businesses often face a significant gap in access to funding that is pivotal to their survival and growth. Whether you get a line of credit, leverage an early payment program or enter into an invoice factoring agreement, your business’s success often depends on securing working capital. Optimizing cash flow is a consistent priority for most businesses. When you need quick cash for your business, invoice factoring may sound ideal, especially if you don’t qualify for traditional options - but it comes at a cost.
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