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Factoring Myths answered in Sri Lanka

MYTH: I've never heard of it. Is it really in existence?
ANSWER: Factoring has been in existence around for over 4,000 years. Many companies have benefited from factoring even though this is still at its infancy in Sri Lanka. What else, every credit-card holder makes use of factoring on a daily basis. When someone buys something on credit, your credit card provider pays the shop owner and collects the money from the credit-card holder at a later date. Interest continues to accrue until the balance has been paid in full though there is an interest free period (Usually 52 days from the date of purchase within the credit cycle). Accounts receivable factoring resembles the same.

MYTH: Factoring is an expensive financing arrangement.
ANSWER: It's important to consider the fact that the fee charged by the factor (Service Provider) is not the same thing as an annualized interest rate you see on other borrowings. For example, if the factor levies you 10% per month, it does not mean that you will be charges at 120% per annum. Instead, the factoring fees stop the day an invoice is paid. You do not typically wait 12 months to receive payment on your invoices, so the fee is not nearly as large as you perceive it to be.

MYTH: Factoring is a long-term commitment.
ANSWER: Unlike a bank loan, most factoring companies do not require a fixed-term financing commitment. You choose when, who, how much and how long to factor your invoices.

MYTH: We will lose relationship over our accounts.
ANSWER: Factoring with certain providers makes it easy for you to manage your invoices as they have an online reporting system. As a result, you have the ability to review accounts and collections in real time via a secure Internet connection.

MYTH: Our customers will think we have cash flow management issues.
ANSWER: Remember, lots of businesses including manufacturing & trading, health care, retail and wholesale use factor as their new accounts receivable department. This has improved customers’ perception about the company’s professionalism.

MYTH: Our customers will be bothered by frequent calls.
ANSWER: Factoring company will initially contact your customer to verify that the invoices. If there is a problem on the invoices, factor will contact you to resolve the issue not with your customers.

MYTH: Factoring firm can not understand the complexity of our business.
ANSWER: Before you jump into any conclusions, just think that all these factoring companies are monitored and regulated by the relevant regulatory bodies and they will not grant permission to carry out their operations if they do not have sufficient professionals in house. At the same time, these companies are well exposed to various businesses as they have different areas of businesses in their line ( Eg. Banks or leasing businesses). As a result, they are able to properly understand your business model.

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