Myth buster: If I factor, I will lose customers
There are two myths that, unfortunately, have tainted many business owners’ perceptions of alternative financing techniques like factoring. One is that factoring is too expensive. Another is that if you factor you will lose customers because you appear financially weak.
The truth is that a lot of businesses fail because they simply refuse to consider alternative financing when it is the best solution. Instead they waste valuable time searching for bank financing or courting investors and partners. In the meantime, they alienate their suppliers, beg their customers to take early pay discounts and miss important deadlines like taxes. The net result can be far worse than anything an alternative financing source could cause.
How It Works
Under a typical factoring arrangement, the client’s customers (or “debtors”) are instructed to remit payments to a specific P.O. Box (or lockbox) controlled by the factor. This causes some business owners to fear their customers will assume their business is in some kind of financial trouble and subsequently switch suppliers. But this is simply not the case.
In reality, every payables department in every large company has been instructed to remit payments to third parties and P.O. boxes all over the country without giving it a second thought. The payables clerk registers the change remittance notice in the company’s system as he or she has done many times and very few people outside the payables department are even aware of this change.
Part of the reason is that factoring is much more common than most business owners realize, and it doesn’t catch most accounts payable personnel by surprise. In fact, when an invoice is properly factored, it usually receives more attention because the payables clerks know that:
- The invoice will be accurate and all the paperwork in order.
- If there are any paperwork issues, they will be addressed quickly and professionally by the factor.
- Factors report directly to the major credit bureaus, so clerks make sure factored invoices are always paid on time
It’s also important to note that a good full-service factor will not benefit by involving themselves in disputes between clients and debtors about product or service quality or delivery deadlines. In fact, a good factor will reduce the number of disputes by making sure all debtors are creditworthy and surfacing problems early so they can be addressed quickly.
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