Factoring and invoice discounting

Advantages and disadvantages of factoring

There are a number of advantages to factoring but it is also worthwhile to consider any potential drawbacks.

Advantages of factoring

Factoring provides a quick boost to cashflow. This may be very valuable for businesses that are short of working capital.

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

Disadvantages of factoring

Queries and disputes 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.

The Asset Based Finance Association provides further informaion on factoring, invoice discounting and asset based lending.