Businesses often have a misguided view on the pros and cons between factoring vs. private equity. One of the most common misconceptions about factoring is that it’s too expensive or risky, while private equity is largely considered to be a safer way of expanding business and boosting shareholder value. Whether funds are needed to pay debts, maintain operations, or expand, both options should be considered. Both factoring and private equity serve many of the same purposes. Yet they are vastly different from one another.
Small businesses especially should learn about the different motivations of factoring vs. private equity firms, and how they make money. Private equity firms acquire partial ownership of companies, allowing these companies to expand using the capital that private equity firms used to purchase their stake in the company. Equity firms can then share in the profits. Any time ownership changes hands, even just partial ownership, this poses a big risk to the original owners. If the company turns out not to be profitable, then equity firms can sell their stake to whomever they want.
Factoring firms hold no stake in the companies of their clients. Instead, they offer to purchase only the account receivables that these companies already own. This allows companies to have immediate liquidity. In turn, the factoring firm gets to collect the full amount of the invoice, takes the loan and fees and then pays the balance to the client. To reduce risk even further, these factoring companies do their homework to ensure that these account receivables are credit worthy and will pay their bills. An additional advantage is that a rate is agreed upon from the get go.
The high cost for factoring services is another myth. At J&D Financial, we provide a detailed account of our factoring services with consideration to your company’s capabilities as well as the ability of your clients to pay. It should also be considered that you will no longer have to go after your clients to collect from them. We will do this tedious work on your behalf, allowing you to focus on your core business processes.
Finally, the last myth about factoring is that they are useful only for large corporations with millions worth of receivables. That would have been true a few decades ago, but the need for a variety of financing options has led factors to cater to a broad range of industries.
J&D Financial has been serving the liquidity needs of a diverse portfolio of clients for over 30 years. To learn more about our factoring services, feel free to contact us.