- 10 Mar
The Pros And Cons Of Factoring
I just saw a question posted on twitter asking about the pros and cons of factoring and I wanted to answer it really simply for any businesses that are considering factoring their invoices.
PROS OF FACTORING
- Improved business cash flow & cash lump sum released - when you first start factoring you can release a large proportion of the cash that is tied up in your unpaid sales invoices.
- Funding grows with your business - the more invoices you raise the more funding is released unlike a traditional bank overdraft or loan where the funding is a stated amount. Hence the funding from factoring grows with your business.
- Help collecting in unpaid sales invoices - the factoring company will normally provide a full or partial collections service (depending upon the provider). This can mean you don't need to employ credit controllers or waste your own time chasing unpaid sales invoices.
- Protection against bad debts (optional) - many factoring companies offer protection against bad debts (non recourse factoring) as an option.
CONS OF FACTORING
- Cost - there is a cost to use a factoring service. Having said that you can shop around to find the best deal for your business. You can also offset the cost against not having to employ credit controllers and having improved cash flow which can mean being able to demand discounts from suppliers.
- Minimum charges - some factoring facilities will have minimum monthly or annual charges. These vary dramatically between different providers and there are also spot factoring facilities that do not require you to pay any kind of minimum charge.
- Security requirements - additional security such as personal guarantees may be required. Some factors may be prepared to limit these substantially and in some cases they may not be required.
- Contract length & being tied in - many factoring companies will require a minimum contract length and lengthy notice periods. Again this is not universal and you need to shop around. Some factors offer very short notice periods for termination of the facility and spot factoring does not require any form of notice to terminate the facility.
- Having a factoring company contacting your customers - some customers are uncomfortable with this as they want to retain control of their contact with their customers. There are options such as Confidential Invoice Discounting where you do not receive the credit control service and you retain the credit control function in-house.
- Set up process - in some cases the set up process for factoring can be lengthy and complicated. Again this is not universal and there are siginifcant difference between different factoring companies.
I hope this helps.