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Factoring Advantages and Disadvantages

HomeFactoringFactoring Advantages and Disadvantages

Invoice factoring offers a number of advantages to businesses over other forms of finance. However it is important to understand the advantages and potential disadvantages before making a decision on whether to undertake invoice financing.

Benefits

The principle benefit to any business of invoice factoring is that it provides quick, timely and significant increase to a company’s cashflow. This is an important aspect to businesses short of working capital, especially when finance of 80% of outstanding debt can very often be leveraged. Other principle benefits include:

  1. Sales ledger can be outsourced, freeing up resources
  2. Money is available from your sales ledger as soon as it is invoiced
  3. Money is available for any business purpose such as funding advance orders or capital investment
  4. Non-recourse factoring offers protection from bad debts
  5. The factoring provider can provide valuable information about the credit rating of your customers
  6. The factoring provider can sometimes assist in negotiating better terms with your suppliers
  7. You do not have to deal with customers attempts to delay payments and often customers will pay more promptly because they are dealing with a professional factoring company
  8. Provides a smoother cashflow and allows for improved financial planning

Pitfalls

Depending upon how well the business is run, a downside can be that there is an extra process in the administration of the cashflow. Especially as disputes cannot necessarily be processed as easily as if the resource were entirely in-house. Factoring is best used when a business is run efficiently and there are few disputes with customers over payments. Other negative aspects include:

  1. An additional cost payable to the factoring company
  2. Some customers may be put off by invoice factoring
  3. There can be a long tie in period with many factoring agencies
  4. Factoring companies may impose conditions on your customers and how you do business with them
  5. You lose the direct link with customers over chasing debts which may sour relationships if the factoring company is too aggressive
  6. The potential for other borrowing may be reduced as the value of your book debt cannot be used as security