Invoice Factoring is Broken—Here’s How It Can Be Saved

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Factoring companies are notorious for high fees and confusing contracts. They’re also notorious for interfering with customer relationships. 

The key here is that it’s the factoring companies that are giving factoring a bad name—not the practice itself.

The reason that factoring now has the reputation as the payday lending of business funding is that the companies offering factoring services aren’t motivated to make the process any better for you.

Plus, if you’re already paying the bill, why would they try?

But what would invoice factoring look like without the antiquated, often predatory, practices of traditional factoring companies? What if factoring could be a transparent, cost-efficient, and seamless process?

Fortunately, there’s an effective way to accomplish this. Here’s how the time-tested practice of factoring can change—and be rescued from the factoring companies.

Why factoring must change

If you’re a small business, you might have noticed how banks act like they’re doing you a huge favor by even talking to you. If you’re really lucky, they might give you a sliver of financing.

If you can’t secure a bank line of credit or an asset-based loan, you might turn to family, friends, credit cards, and other means to access the working capital you need.

When that’s not enough, factoring is often the only option left. Factoring companies know this, and many try to capitalize on that advantage.

Factoring can be costly, and not because of risk. Advancing capital based on money owed by stable businesses isn’t all that risky.

The cost of factoring is more often a function of:

  1. Limited alternatives for the client
  2. Outdated systems
  3. Numerous hidden fees
  4. Terms that benefit the factor
  5. Inefficient processes

Traditional factoring companies don’t feel the need to evolve or become more transparent because they know that factoring clients have limited funding options.

And when you’re charging the rates they’re charging, why change?


The reason factoring will change is that new market players are going to put pressure on the entire industry.

Factoring companies that refuse to evolve will go out of business. The ones that remain will have to offer a new and better form of invoice factoring.

Here’s what that will look like:

Fair, transparent invoice factoring 

In an ideal world, factoring would empower entrepreneurs to grow their businesses with a transparent, cost-effective, and efficient process.

Instead of charging high fees and trapping entrepreneurs in confusing contracts, factoring could be affordable. The contracts could be simple.

The following table illustrates what factoring is today, and what it could ideally become:

Factoring Today Factoring 2.0
Costs Attractive APR
Hidden fees
High ACH/transfer costs
Portal charges
…all leading to a much higher APR
Attractive APR
Simple fee structure
No transfer fees
No random charges
…what you see is what you pay
Terms Complex
Confusing
Written in legalese
Simple
Easy to understand
Written in plain language
Customer
Relationships
Potential for interference Non-disruptive
Termination Difficult Simple

The main takeaway from the table above is how factoring companies hide costs and create obstacles to growing your business. They lead with an attractive APR, then dump a litany of obscure charges on top of everything.

They hide behind lengthy, confusing contracts written in legalese. Before you know it, you could be paying a 36% APR and have no idea how you got there.

“Even the water utility company provides detailed billing statements. So why are we okay with our factoring companies not providing statements that break down the costs? There’s something very wrong with that.”

Chris Atkins, Vice President of C2FO Capital Finance

The first thing that must be done to make factoring a better option is to fix the transparency problem that factoring companies have created. It comes down to:

  1. Clearly laying out the cost structure
  2. Simplifying contract language so that anyone can understand it
  3. Providing a detailed statement of every single thing a customer is charged

Fix those three things, and factoring becomes a more valuable, appealing financing option for entrepreneurs.

That would be a significant improvement from the way many view factors today—as parasites feeding off small business owners’ need for financing.

C2FO saves factoring clients up to 70% on their cost of working capital.

How technology drives the future of factoring

Because many traditional factoring companies are weighed down by legacy technology, they still rely on inefficient processes.

By replacing the clunky, inefficient and manual factoring process with automation, simple online portals, and cutting-edge technology like machine learning, companies like C2FO are dragging factoring into the 21st century.

As a financial technology company serving thousands of small businesses, a technology-forward approach creates a better financing experience by:

  1. Making it easier to set up a factoring account
  2. Enabling you to use factoring as much or as little as you need
  3. Limiting service costs to decrease your costs of funding
  4. Dynamically increasing credit limits as your business grows and loads more invoices
  5. Giving you transparency into exactly what you’re paying

A lot has changed in 50 years, yet many factoring companies still run on decades-old technology. Ever heard of an AS/400, circa 1988? Yeah, we had to look it up, too.

The result of this is more human intervention than necessary, higher servicing costs, slow-moving processes, and the inability to provide a transparent view into your factoring account.

A straightforward and valuable solution

Turning receivables into cash flow quickly and conveniently has the potential to transform your business.

As a vehicle for building working capital, factoring remains a straightforward and valuable solution. It just needs to be brought into the 21st century.

Modern providers like C2FO are fixing factoring by:

  1. Making contracts and billing statements simple and transparent
  2. Eliminating hidden fees, charges, and other bait-and-switch tactics
  3. Leveraging technology to bring costs down, increase efficiency and visibility

Unlike traditional factoring, C2FO’s working capital solutions give you access to credit that matches your business growth.

As your eligible invoices grow, so does the amount of credit available to you—up to $100 million.

Ready for a better way?

C2FO saves factoring clients up to 70% on their cost of working capital.
Contact our team to see how much you can save.