There are many common myths: dogs see in black and white, humans use only 10% of their brains, etc. While some are fun to ponder, others limit opportunities for no real reason. Factoring is one of those. That’s why we are digging into common myths of factoring and factoring companies, especially as they relate to the construction industry.
Top Myths About Factoring:
- Factoring is for companies in trouble
- Factoring messes with existing financing
- Factoring hurts the business/customer relationship
- Factoring companies steal control of your finances
- Factoring is for larger construction companies
- Factoring requires good credit
- Factoring is expensive
Factoring Myth 1:
“Factoring is Used When You’re in Financial Trouble”
There is a misconception among some construction companies that using invoice factoring may give the impression that a construction company is having financial troubles. However, factoring as a strategic financial tool can be used by businesses, including construction companies, to manage their cash flow effectively. By demonstrating proactive financial management and a commitment to meeting financial obligations promptly, factoring can actually enhance a construction company’s reputation as a reliable and financially stable business.
The Roots: The myth may result from a limited perception that factoring is a last resort option. Yes, some companies do use factoring in an attempt to get out of trouble, but many use factoring as just another tool in their financial toolbox.
Factoring Myth 2:
“Factoring Complicates with Existing Financing”
Some construction companies may believe that invoice factoring will create complications with their existing financing arrangements. However, factoring is a separate financing solution that does not typically interfere with existing loans or lines of credit. Factoring companies primarily evaluate the creditworthiness of the company’s customers rather than the company itself. This means that construction companies can still maintain their current financing relationships while benefiting from the additional working capital provided by invoice factoring.
Roots: This myth may be fueled by simple assumptions about the details of all the different financial products.
Factoring Myth 3:
“Factoring Hurts Customer Relationships”
Another myth is that invoice factoring may strain their customer-business relationships. However, in reality, invoice factoring is a common and widely accepted practice in business. It allows construction companies to improve their cash flow and meet their financial obligations without affecting their customer relationships. The factoring company typically operates discreetly, and customers are often unaware of the involvement of a third-party factor in the transaction.
Roots: When starting the factoring process a Factor will contact the holder of the invoice. If this is the first the company hears about the new relationship, it can be confusing or worrisome. Keeping a positive working relationship for everyone means no surprises. So to avoid this myth, early communication is vital.
Factoring Myth 4:
“Factoring Companies Steal Control of Your Finances”
Some construction companies may worry that when choosing factoring, they will lose control — that they will be treated as an “outsider” in decision-making after selling their accounts receivable invoices. While they do turn over complete control, reputable factoring companies work closely with everyone involved to ensure not only a smooth transition of the invoice buyout but also communication during the factoring period. Constant collaboration between the construction company, its customers, and the factoring company is essential to address any concerns and maintain a transparent, worry-free environment.
Roots: Good factoring companies will include your business in all communications with the invoice issuer during the whole factoring process. Unfortunately, limited communication can fuel the worry that the factoring company has come in and taken total control.
Factoring Myth 5:
“Factoring Is Only for Larger Construction Companies”
Strangely, there is a fallacy that invoice factoring is only available for larger construction companies, and smaller businesses may not qualify. However, factoring companies cater to businesses of various sizes, including small and medium-sized enterprises (SMEs). Factoring can be a viable financing solution for construction companies of all scales, enabling them to access working capital quickly, regardless of their size or financial history.
Roots: Again, this myth probably stems from a simple lack of education about how factoring works. If your client has good credit, factoring can work for you… whether you are a large or small company. In fact, factoring can be easier for some smaller companies.
Factoring Myth 6:
“Factoring Is Only for Companies with Good Credit”
It’s a common misconception that factoring is exclusively available to companies with stellar credit scores. However, unlike traditional lending institutions, factoring companies primarily focus on the creditworthiness of the company’s customers rather than the company itself. This means that even if a construction company has less-than-perfect credit, it can still qualify for factoring as long as the customers have a solid payment history.
Roots: General assumptions about factoring or how factoring companies operate, in general, have led to this myth.
Factoring Myth 7:
“Factoring is Expensive” (well, sometimes it’s true)
If you’ve done research on this topic, you know that factoring fees are typically higher than those of traditional bank loans, especially in a head-to-head comparison. However, it’s crucial to consider factoring beyond just the percentage you pay and take into account the additional benefits it can offer. Time is a valuable resource in construction, and with factoring, you can get paid much faster, allowing you to strategically utilize that money. By avoiding delays waiting for client payments, you can avoid losing out on new job opportunities due to insufficient cash flow and maintain steady payments to subcontractors to name a few.
Additionally, factoring companies, especially industry-specific ones, often provide additional services like credit management and risk mitigation. This further adds to the value proposition of factoring.
For construction companies, it’s essential to evaluate the entire impact on their business when considering funding options, including factoring. The advantages gained from improved cash flow and increased financial flexibility often outweigh the cost of factoring fees.
Of course, you’re free to believe all the misconceptions. But by understanding the whole truth about factoring, you can choose to use it as a tool to help with your day-to-day finances and growth. And if you hear more factoring myths that just don’t sound right, let us know. We would love to dispel them!Back to blog