Factoring and invoice discounting: the basics

Advantages and disadvantages of factoring

There are numerous advantages to factoring, but also some potential drawbacks, as with any type of funding.

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
  • factors may give you 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
  • cash is released as soon as orders are invoiced and is available for capital investment and funding of your next orders
  • factors will credit check your customers and can help your business trade with better quality customers and improved debtor spread

Disadvantages

Queries and disputes may have to be referred on and may have a negative impact on your available funding. 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 other borrowing - book debts will not be available as security.
  • Factors will restrict funding against poor quality debtors or poor debtor spread, so you will need to manage these funding fluctuations.
  • To end an arrangement with a factor you will have to pay off any money they have advanced you on invoices if the customer has not paid them yet. This may require some business planning.
  • 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.

     

    Developed with:

    Asset Based Finance Association