By Frank M. Hennessey, chairman & CEO, Hennessey Capital
Many professional advisors and consultants - including CPAs and bankers - are sometimes hesitant to recommend alternative business financing solutions to their clients. But factoring, commercial finance lines, advance pay programs, purchase order financing and supplier guarantees are viable financing alternatives. The problem is that many misconceptions exist concerning these options, so let's look at two of them.
Myth 1: Factoring is too expensive
In reality, factoring- the sale of accounts receivable or invoices at a small discount to obtain immediate cash - is a cost-effective way to get funds for your business. Company owners should understand that the most expensive form of capital is equity. Raising additional equity to finance new growth or meet working capital needs often entails giving up a portion of ownership, and that's terribly expensive. Using factoring to fund new growth normally entails a slight reduction of profit (usually 1 to 3%) that's comparable to vendor discounting and generally outweighs the alternative of not taking on new business. Many companies see it as offering their customers a discount to pay early and getting all the bells and whistles that come along with the factoring service.
Myth 2: Factoring is a sign that my business is weak
Factoring is actually a way for businesses to prepare for a stronger future. Factoring can improve a company's credit rating, provide cash to me.
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