It’s my favorite question and one that I have answered a thousand times. I just hate to think about the business owners who didn’t ask me the question. Did they end up going out of business, or did they lose control to a FinTech lender, an investor, shareholder, or partner? At least if they had asked me, they could have made an informed decision.
All retailers accept credit cards, and in the cashless society ahead, it might be every transaction. Factoring is already used extensively in industries like transportation and apparel here in North America. In the rest of the world factoring is a common practice in every industry. We are catching up quickly and it’s already more common now than most people think.
As usual, good communication is the key to success and that really applies to factoring. I advise every business owner before they factor to let their customers (debtors) know personally what they are up to. It’s not only common courtesy, but it’s also important for security reasons as well. A letter or an email out of the blue is not advisable. The conversation they have is also a great marketing opportunity.
I advise my clients to present the positive aspects of factoring, like being able to provide better customer service and faster growth. I encourage them to remind their customers that they alone stand behind their product(s) or service(s). A letter of notification or an email then makes everything clear and understandable. Everyone is familiar with outsourcing these days.
Debtors know that factored invoices are professionally managed. They are more accurate because they have been checked over so the backup always supports the invoice. If there is an invoice or payment problem, they know they have someone to call who will deal with it promptly. Factored invoices tend to get paid quicker over time.
There are different levels of notification available in factoring arrangements. They can range from “Full Notification” where documents must be signed to “Non-Notification” where a factor is not even mentioned. Risk will determine the level of notification required in each situation. Much like factoring programs range from spot factoring to fully margined A/R lines of credit.
Let us hope that in the post-COVID world business owners will be less concerned about their image and more focused on delivering a great product at a fair price. Factoring can help them eliminate cash flow problems while growing sales, and along the way help to reduce office time while providing a flexible approach to working capital. In my opinion that makes a business stronger.