Accounts Receivable Financing
Broaching 3rd Party Concerns: Dispelling The Myth Of Factoring
One of the biggest concerns potential factoring clients have, aside from the potential costs involved, is this - what will my customers think if I begin factoring?
Why is this the case? For better or worse, factoring still has a perception of being the 'option of last resort,' to be used only by companies experiencing financial difficulties. So when your customers learn that you are about to start factoring, sometimes it can cause an alarm to go off in their heads. Something must be wrong with my supplier's finances, they might think. How can we handle this issue of potential customer concern?
Basically, by letting them know that there is no reason to hit the panic button, and that you are not about to disappear into that dreaded red sea. The best way to do this is to simply re-direct their thinking about factoring, especially as it relates to your company.
For instance, let's suppose that, like many businesses, good sales and slow payments has caused a cash flow problem, and like many of us you go to a bank. The bank approves your request, and you obtain a loan for the money you need. The next day, in a conversation with one of your customers, you happen to mention that you have secured a bank loan. What will your customer's response be? Will he or she begin to panic, asking hysterically why you needed to get a bank loan? Will they think that you must be in serious financial trouble because a bank actually loaned you money? Of course not.
Bank loans are seen as a normal part of doing business - everyone needs money at some point, usually on an ongoing basis - and a bank loaning money to a business is always seen as a good sign. It is, in effect, seen as a vote of confidence by the bank; an implicit acknowledgement that that business is strong, and will be around for a long time yet. So the response you'll likely get from your customer, when they hear that you've obtained a bank loan, will probably be positive.
Now, what's the difference with factoring? If a factor decides to establish a relationship with your company and sends you an advance, what is that factor saying about you? Are they saying that they think your company is in financial distress? Hardly. Factors do not get involved with companies they have no confidence in anymore than the banks do. If a factor takes on your company as a client, they are giving you a vote of confidence. Similar to a bank, they are, in effect, making an investment in your company and its future.
One of the biggest reasons, if not the biggest reason, why companies turn to factoring, is because they are in a rapid growth stage and it is taxing their cash flow. It's a familiar refrain - you have good sales, but slow payments. The inflow of cash is struggling to keep up with the outflow of cash needed to keep pace with customer demand.
Who is it that is causing you to have this little cash flow "situation"? That's right - your customers. Those same customers that demand you provide your product or service on time, and then expect extended credit terms. These same customers, as it so happens, who are now concerned about you factoring, when in fact you have been helping them finance their businesses. It goes without saying that if they were to pay you up front, you wouldn't need to factor. Your cash flow would be just fine, and you could fill their orders without worrying about where the money to pay for it was going to come from. Simply put, your customers continue to enjoy credit terms, while you enjoy a C.O.D. relationship!
At Tanner Financial Services Inc., part of our service to you includes meeting with you and your customer together, if you so desire, to explain clearly and simply how the program works and how all parties benefit.
