Advantages and disadvantages of factoring

Advantages and disadvantages of factoring

There are numerous advantages to debt factoring, but also some potential drawbacks.

Advantages
Factoring provides a large and quick boost to cashflow. This may be very valuable for businesses that are short of working capital. A business that is owed £500,000 may be able to get £400,000 or more in just a few days.

Other advantages:

there are many factoring companies, so prices are usually competitive
it can be a cost-effective way of outsourcing your sales ledger while freeing up your time to manage the business
it assists smoother cashflow and financial planning
some customers may respect factors and pay more quickly
you may be given useful information about the credit standing of your customers and they can help you to negotiate better terms with your suppliers
factors can prove an excellent strategic as well as financial resource when planning business growth
you will be protected from bad debts if you choose non-recourse factoring - see the page in this guide on recourse factoring and non-recourse factoring
cash is released as soon as orders are invoiced and is available for capital investment and funding of your next orders
Disadvantages
Queries and disputes may have to be referred on. For this reason, factoring works best when a business is efficient and there are few disputes and queries.

Other disadvantages:

The cost will mean a reduction in your profit margin on each order or service fulfilment.
It may reduce the scope for borrowing - book debts will not be available as security.
Factors may want to vet your customers and influence the way that you do business.
It may be difficult to end an arrangement with a factor as you will have to pay off any money they have advanced you on invoices if the customer has not paid them yet.
Some customers may prefer to deal directly with you.
How the factor deals with your customers will affect what your customers think of you. Make sure you use a reputable company that will not damage your reputation.
You have to pay extra to remove your liability for bad debtors.