The Service is Costly
One of the most common questions asked about factoring is in regards to the cost of factoring. Unlike traditional finance where the cost of funds is associated with the amount received, the cost of factoring entails not only the amount of working capital received but also the back-office support that comes along with such partnership. Allow me to explain; Factoring is not a loan that creates debt to repay. Factoring is an advance on your credit worthy receivables allowing a company to release the funds tied up in the receivables because of the necessary 30 / 60-day terms allowed for payment. The most important piece missing in the equation included in the cost of funds for utilizing a factoring service like Diversified Funding Services is the fact that along with your advance your cost of funds includes back office services that become an extension of your company for invoice monitoring from intake to collections.
On behalf of your company when verifying the receivables, we are making sure your customer is happy with the product or service your company provided which identifies any issues that may need to be addressed. We also monitor those receivables through the collection process making timely follow up friendly collection calls making sure all is satisfied, and the invoices are slated to be paid on the allowed terms. We also provide credit monitoring for potential new and current customers of your company. Every 90 days, credit checks are made to make sure the stability of your customers maintains a healthy credit status as well as the credit strength of those potential new customer’s ability to pay for your product or services. Some businesses you may not need to extend terms on as it could put your business in a negative position if you allowed terms without this knowledge.
So, as you can see in the end, Factoring is not just “here is your money now pay us back.” We are a financial partner that not only provides working capital for your business but other important services come with this which shines the light on these costs that now feel not so costly. It would cost your company more to hire just one employee to monitor your receivables from start to finish and monitor customer credit.
Companies Use Factors Because they aren’t Credit-Worthy Enough to Deal with a Bank
Sometimes companies may not be bankable due to reasons unrelated to credit-worthiness. Maybe they are a startup and haven’t been in business long enough; maybe they are going through a rapid seasonal growth and are heavy in receivables with not enough assets immediately available for a bank to be comfortable financing. As far as traditional financing goes, just because its available doesn’t mean you should take it. Some companies may qualify for a small loan or line but quickly burn through those funds and are still in need of working capital. Factoring allows a company experiencing rapid growth to stabilize and then get the bank financing to keep things running smoothly once cash flow requirements are stabilized.
Also, many times, companies will get into a downward cycle of debt. With so many online lenders and companies advance multiple products from several different companies all future sales profits are removed because that revenue is already committed to pay back those loans. Thus, the downward spiral is in effect and no other option is available because too many lines are in place. Factoring is not debt. A good factoring company should want to bring your business a solution. A financial tool that can grow and stabilize your business and eventually the goal being to be able to return to the bank again, not sink you further into debt when no options are there. A good factoring company should be there for you to help you determine the root of the problem and help you find a solution.
Factoring Companies are also Collection Agencies
Factoring companies are experts on improving your cash flow by ensuring the customer is happy and maintain professional and polite reminders of when the invoice is due. It is in the best interest of the factoring company to see your business succeed, not to use harsh collection tactics possibly jeopardizing the relationship you have with your hard-earned customers. Anytime there is a collection problem, a good factoring company will contact you first. Another advantage to using a factor is it can shorten the length of time of collections because they monitor everything from the intake of the invoice to the due date. Factors start with the terms offered and see it through from beginning to end. When our company verifies invoices, we check all the details. These details include credit worthiness of customers and administrative features. Even small things such as missing signatures can put a delay in the collection process. Again, we are an extension of your company.
If we cannot fund a certain receivable, we let you know why so that you can make an informed business decision based on the knowledge we provide. We have a massive amount of resources to help us determine if your customers are creditworthy. We may be able to help still with the back-end side with monitoring your receivables, collection calls, and credit monitoring even if you don’t qualify for factoring to help your business better understand when and who you should extend credit terms to.
Overall, there are many values and advantages to factoring that many people misunderstand. One value is that you won’t get your company in more debt. Another convenience is that you gain the value of having more administrative support, an extension of your company to monitor your receivables and help customer retention. Another advantage is that it is in the best interest of the factoring company to grow your business and make you bankable whether it’s credit or cash flow dragging your business down.