Advantages and Disadvantages of Factoring & Invoice Discounting
- Immediate Cash without consideration of a business’s credit rating.
- No long term contracts, you can discount as much or as little as required within agreed limits. Unlike overdrafts the facility does not need to be renegotiated when increased.
- No other security required.
- Factoring provides the company with professional credit collection services.
- Factoring reduces Overheads via reduced credit department offsetting the costs and can make the actual costs near to zero.
- Increased cash flow, increasing working capital, eliminating overdrafts, allows bills, taxes to be paid on time.
- Off balance sheet financing improves credit rating allowing further borrowing if required.
- Cash on hand allows opportunities that present themselves to be taken.
- Service / interest charge need to be compared against traditional banking facilities.
- Some types of Invoice Discounting i.e. factoring is disclosed to your customer so you need to have confidence the factoring company is courteous & diplomatic with your customer as you would be.
- Watch out for term of contract and notice periods. Termination requires full repayment of funds.