Hit or Myth?

Posted: 31st January 2015

For some reason Invoice Factoring seems to have more than its fair share of misperceptions from the general business community. 

Some of these may be based on historic facts, some may be misconceived and some are just plain wrong.  These myths about factoring may unjustly put off business owners who may in fact really benefit from these services.

Welcome the Mythometer!   This ranks the myth 1 - 10 on a sliding scale.   1 being completely factually correct and 10 being a load of baloney.

Myth 1:   Invoice Factoring is expensive                                      MYTHOMETER RATING:      8 / 10   

There are two reasons why this statement is wrong.  Firstly it tends to compare factoring costs with overdraft.  Factoring will normally cost more than a bank overdraft but it provides a lot more in terms of service. 

Invoice Factoring not only provides funding but it also provides a complete credit control service, credit checking and even credit insurance if required.  

If we consider the standard cost of a factoring facility against employing a credit controller, credit checking and credit insurance, it is very cost-effective.   For more on this see the Blog “How Invoice Factoring saves you money”.

But what about Invoice Discounting where there are no additional services provided?  

The Invoice Finance market is now lending over £19bn and advances more money than overdrafts in the UK. It is a highly utilised, highly competitive market.  As bank charges have risen over the last few years Invoice Discounting charges have plummeted.  Invoice Discounting is now directly comparable to overdraft in terms of charges.

Myth 2:   It benefits the Invoice Factoring Company to be slow at collections.

                                                                                                        MYTHOMETER RATING:      9 / 10

The theory here is that if the Invoice Factoring Company slows collections then debtors are greater and the client needs to borrow more, thus increasing their interest charges.   

Whilst factually correct, the truth is that the priority for an Invoice Finance Company is risk management, and poor credit control means a greater risk of bad debts and non-payment.  There may be a small pricing advantage in delaying payments but it is more than offset by the additional risks in doing so.  It really is in the Factoring Company's interest to be good at collecting money.

Myth 3:   You will be tied into a long contract                             MYTHOMETER RATING:       2 / 10

It’s true that most Invoice Finance companies will normally sign up new clients for a 12 month period. Some will ask for 3 months' notice, some 6 months.  This will be from the end of the contract period, so the contract could effectively last for 18 months.*  The positive side of this is that the facility can’t be whipped away at a moment’s notice as some clients with overdrafts have found to their cost.   But if a client does want to leave early then the Invoice Finance Company is entitled to charge for the rest of the agreement period. 

However it may be possible to negotiate these contractual periods down – note that this needs to be done before anything is signed.

*Macla offer a 1 month rolling contact in certain situations, so there is no long term commitment.

Myth 4:   Factoring is only for failing companies                          MYTHOMETER RATING:      10 / 10

This is rates highest on the mythometer rating as it couldn’t be farther from the truth.  Invoice Factoring works best for successful businesses that are growing fast (what the accountants call over-trading).   With growing companies it is difficult, if not impossible, to match payment terms to supplier terms; this means that there is an inevitable cash flow gap.  Invoice Factoring is ideal for this situation as it links funding directly to sales – the facility automatically grows as sales grow.

As poor cashflow is the prime reason for company failures, businesses that factor their invoices are actually in a healthier position than those that don’t.

Myth 5:   Factoring will upset my customers                                 MYTHOMETER RATING:      8 / 10

The only customers likely to get upset by you factoring your invoices are those that are not paying you!   Factoring is so commonplace now that pretty much everyone will have to pay a factoring company at some time.  It’s true that some Factoring companies are better than others.  It may be that a big bank Factoring Company may not provide the same level of service as an efficient independent. But a good factoring company will treat your customers professionally and courteously and will include you on all major decisions e.g. before sending out stroppy letters.   

Don't Myth the Boat

In the UK alone Invoice Finance accounts for over £19bn of funding to over 43,000 businesses.  The market has grown consistently over the last 20 years.  It has become one of the most popular methods of funding for UK companies. 

If your business is demanding more and more working capital then Invoice Factoring may be the perfect solution for you.  Don’t be blinded by myths and superstitions or put off by people who don’t know the facts, decide for yourself whether these facilities may work for you.  Or better still talk to a business that uses these services - we will happily introduce you to any of our clients. 

You can read some of our clients' stories here