What are the Advantages and Disadvantages of Invoice Factoring

Invoice finance grew steadily in the first six months of the year, with more than 40,000 business receiving funds via the invoice finance and asset based lending route, according to UK Finance. The trade body added that total advances to businesses stood at £21.4billion at the end of Quarter 2 2018 and that the demand for fast and flexible working capital was being driven by an increased number of larger businesses opting for this type of lending.Traditionally, invoice finance has been used by smaller businesses looking for a short-term cash flow boost.

Invoice finance can be divided into a number of sub categories; one of which is factoring, which is suitable for a wide range of industries, offering the flexibility directors need to be able to respond quickly to market changes. Let’s take a closer look at the advantages and disadvantages of invoice factoring

Advantages of Invoice Factoring

Factoring offers directors the following advantages:

  • Improved cash flow – one of the main benefits of factoring invoices is that funds are released quickly and cash flow improves almost immediately
  • Added confidence – directors can be confident about extending payment terms to creditworthy customers as they won’t have to wait long to secure funds from their unpaid invoices. Typically, businesses can access funds from unpaid customer invoices within 24 hours of issue
  • Quick solution – factoring arrangements can be put in place faster than a traditional business loan, allowing directors to respond quickly to the needs of the company if crunch time looms
  • Greater flexibility – factoring is flexible as it’s based on the company’s invoices. Therefore, it can grow and adapt in line with the company as its revenues increase.
  • Simple to apply – the application process is far simpler than most other traditional forms of lending. Most companies that have a solid customer base and don’t have major problems should qualify immediately
  • No payment chasing – The provider will manage the collections process and deal with customers directly to reduce late payment and any risk of business loss.

Disadvantages of factoring

That said, factoring isn’t for everyone and there are certain disadvantages that directors should be aware of before they sign on the dotted the line. Factoring offers the following disadvantages:

Cost – the cost can be higher than other types of funding
Solves a specific problem – factoring is designed specifically to tackle cash flow problems created by late-paying customers. if the business requires capital to buy equipment, for example, factoring may not be the right solution for them
Confidentiality – when a factoring arrangement has been put in place, the provider will manage credit control and the collections process, therefore, customers will know that this type of finance is being used
Healthy relationships – many businesses prefer to retain credit control, rather than enter into a factoring agreement that insists on chasing customers for payment.This is because it’s crucial that small businesses maintain healthy and close relationships with customers
Due diligence – most providers will verify customer invoices to make sure that they are accurate and that customers are satisfied with the products and/or services.
Concentration limits – factoring may be unsuitable for businesses that have one or two main customers. This is due to providers stipulating “low concentration limits”.

Factoring is most commonly known for helping businesses to speed up payment cycles for improved and more predictable cash flow. However, there are other aspects to consider, such as the size of the business and whether directors are comfortable with the funder having direct contact with customers to manage credit control and collections. As always, careful consideration needs to be given to factoring and its suitability to the business before signing any agreement

Do You have Factoring Questions?

If you would like to know more about the benefits of factoring and whether it’s well suited to the needs of your business, please call 08000 746 757 or email info@companydebt.com for free and confidential advice from one of our professional advisers.

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