The benefits of accounts receivable factoring

The benefits of accounts receivable factoring

Factoring is an alternative source of financing that involves a business selling its outstanding accounts receivables at a discount to a factoring company.

  • One of the benefits is that a business can get cash almost immediately
  • By factoring accounts receivable a business can get a good source of short-term financing if the business is unable to obtain a bank loan.
  • Factoring accounts receivable adds benefits to a businesses cash flow by providing an ongoing source of cash as long as invoicing is regular.
  • One of the benefits of accounts receivable factoring is that it is not subject to credit checks.
  • There are benefits of factoring accounts receivable factoring when it comes to borrowing. This is because a factoring company will only consider the value of invoices. This means that a business can use other assets, such as property and equipment as collateral for borrowing.
  • Factoring can help protect a business credit rating by providing cash to meet payment due dates on important expenses such as taxation.

Putting the benefits of factoring aside, what are the disadvantages of accounts receivable factoring?

  • Cost is probably the biggest disadvantage.
  • Factoring can be an expensive form of financing.
  • A factoring discount rate of 1% to 5% on invoices with terms of 30 to 60 days results in a much higher annual rate than other traditional forms of financing.
  • Businesses that use an accounts receivable facility cab lose control over the collections process.

Businesses that use an accounts receivable facility often find its effect relationships with customers because the factoring company handles the collections.

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