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Factoring Companies Provide Lower Rates, Better Services than Bank Financing
Factoring vs. Bank Financing Business owners continue to find more options
for financial services through both traditional and non-traditional sources. Today, banks
compete with factoring companies to offer accounts receivable financing; however, it
is important to note that banks may offer a price comparable to factoring companies,
but the experience is completely different. Factoring is a Centuries-Old Business
Factoring is a centuries-old business. After the British colonized the new world, factoring
brokers facilitated trade between sellers in Europe and buyers in the colonies. The
factors learned which buyers could be trusted to pay the money they owed, (which is where
we get into the process of vouching) and then they could provide that credit advice for
a fee. The organizations then began buying and re-selling goods, which allowed them to
turn a profit for selecting reliable clients and avoiding risks through identifying good
buyers. Today’s factoring companies have adopted modern standards, but their basic
services remain the same. Modern factoring companies still buy accounts receivable and
offer cash advances to clients, help a client minimize their bad debt, and offer collection
expertise. Today’s firms may specialize in niche markets, such as staffing, trucking,
and manufacturing. Banks Impose Steep Fees and Restrictions
Banks arrived on the scene later, after observing the growth potential of private factoring
companies. Banks typically seek customers with a steady record of good credit, solvency,
and profitability in order to offset the risk involved with purchasing accounts receivable.
However, they often charge fees up to five times higher than those associated with traditional
loan. Keep in mind that higher fees do not come with services beyond the credit line.
Factoring Clients Enjoy Several Perks Seeking financing through a factor does come
with a number of perks: receivables specialists to help with your purchases, collections specialists
to manage accounts payable and follow-up with your debtors, credit checks and advice on
appropriate credit limits for customers, a client’s credit strength is not an automatic
disqualifier, fast service (advanced payments post within three to five business days),
and same-day funding decisions for some clients. Improve Cash Flow and Gain Credit Advice
Most factoring companies will provide unlimited credit on eligible accounts. Also, by only
accounting for invoices pledged within the factoring agreement, other assets are available
to you for alternative financing. Banks want customers with good credit and sustainability,
yet they subject those customers to slow, often inconsistent credit checks. Factoring
transactions must go through loan committees, auditors, and bank regulators before being
approved, and specializing in a risky industry or not providing profitability may disqualify
a client altogether. In addition, banks lack the expertise to set
proper credit limits, meaning that customers assume the risk of a credit limit that is
set too high, and are constricted by a credit limit that is set too low. Credit lines may
be restricted by offering a loan worth far less than the value of an accounts receivable
and requiring that assets beyond the accounts receivable be used as collateral; maintaining
security interest on all assets; requiring permission to sell some of those assets; and
controlling finances or requiring owners to keep a checking account at their institution.
When looking for financing, choose factoring for its increased cash flow, greater flexibility,
and the credit advice you need most.