Alternative Business Financing Solutions: Dispelling the Myths about Factoring

Many professional advisors and consultants

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 meet obligations and does not create debt on the balance sheet. Many companies take advantage of pooling their own invoices and selling them together in order to generate cash. Essentially this is a version of factoring.

Turning over accounts receivable management and funding to an outside financial service has other advantages. Factoring can eliminate a lot of frustration for business owners who struggle to collect payments on time. In addition, factors can work hand-in-hand with a company's CPA or other professional advisor to help provide credit checks on prospective customers, product validation, A/R collection and cash management.

As companies review their financial forecasts and prior activity, many find they do not have enough working capital to address exciting new business opportunities that come their way during an economic recovery. Some are young, growing companies that do not have the history to support traditional bank financing. Others may no longer qualify for traditional bank financing because of previous quarterly or annual challenges. The solution may lie in seeking alternative sources for funds.

Factoring is flexible, accessible, produces fast results, and doesn't require businesses to commit to a long-term program. The bottom line: Alternative small business financing can provide a winning solution for companies experiencing growing pains.

Frank M. Hennessey is founder, chairman & CEO of Hennessey Capital, a Michigan-based finance company that provides a combination of strategic and financial advice as well as capital to start-ups and growing businesses. Frank is chairman of DTE Energy's audit committee and is a past group managing partner of Coopers and Lybrand's Detroit offices. Visit the Hennessey Capital Web site at

© 2005 BizBest Media Corp.

Previous Article

Story of a young entrepreneur: do what you love

Next Article

Are newspapers still a resource for entrepreneurs?

Related Posts
supply chain
Read More

How to Keep Vendors and Clients Happy During Supply Chain Hiccups

Supply chain breakdowns are happening due to global disruptions, rising costs and increased consumer expectations. Businesses can't always stop supply chain hiccups, but they can learn from them and limit their impact on vendors and clients. How a business responds to a supply chain issue can have far-flung effects. A company that is proactive and...
Read More

WJR Business Beat: Win $10,000 Grant Through Verizon Program (Episode 410)

On today's Business Beat, Jeff provides details of the Verizon Small Business Digital Ready program, including free resources, coaching and $10,000 grants to get your small business up and running. Tune in below for more details:     Tune in to News/Talk 760 AM WJR weekday mornings at 7:11 a.m. for the WJR Business Beat....
pitch your business idea
Read More

How to Pitch Your Business Idea to Startup Investors

Securing funding, whether for a startup or an established business, is not an easy task. A strong startup concept won’t be enough when approaching investors; you'll also need an exceptional pitch to sell it. Let's look at what defines a startup pitch, a few different types, and how to create a fantastic one for your...
implementing new systems
Read More

9 Mistakes to Avoid When Implementing New Systems

If your systems aren’t lean, efficient and precise, you’re wasting time and money while putting your business at unnecessary risk. If you’re going to build out new systems, you need to do it right. Avoid these nine mistakes when building new systems to transform how work gets done in your business. 1. Ignoring human nature...