We set out to debunk a few myths about factoring. We started with a first article you can already read here. We’re continuing, so today we’re tackling another myth we’ve often come across in our experience so far:

Myth no. 2: Factoring is expensive.

For receiving early payment of a percentage of the receivable, the company pays interest on the amount advanced over the financing period, and for collection, receivables administration and/or protection against non-payment, a factoring fee applied to the full value of the receivable.

As such, cost comparisons between factoring and other financing solutions (for example invoice discounting or a line of credit) are entirely misleading. The latter provide pure financing, without the added service components, and their main cost is interest.

It’s important to weigh the cost against the benefits, and factoring comes with a set of genuinely valuable advantages for any company: it turns a term invoice into immediate liquidity, and the size of the facility scales with sales. You can grant longer payment terms to customers or pay suppliers in advance to obtain discounts. You insure against the risk of non-payment and eliminate losses from unrecovered receivables or delinquent debtors. Professional, efficient collection leads to receivables being paid as close to the due date as possible, so outsourcing receivables collection and administration frees up time to grow the business. It’s also worth adding that factoring is a revolving, self-liquidating facility that can be obtained without tangible collateral.

From our experience, the cost of factoring is 2% - 3% of an invoice’s value for all the services included in the product. As such, the benefits-to-cost ratio makes factoring a premium product.

We recommend that when you choose this product you read the factoring contracts carefully and make sure you’re truly getting a factoring solution with all services included, not just simple financing with very high costs packaged under this name.

Keep an eye on the blog; we have a few more articles about factoring coming up. To be continued…