Factoring advantages and dis advantages

Factoring is essentially a financial tool that allows you to finance your slow-paying invoices
from creditworthy customers. Using your invoices as collateral, the finance company
advances funds to your company – providing you the resources to pay important expenses.

any business financing solution, factoring has both advantages and disadvantages.

Advantages of Factoring
Factoring has the following advantages:

 Improved cash flow. The most important advantage of factoring your invoices is that
your cash flow improves – putting you in a better position to cover company expenses.
 Extend payment terms with confidence. You can extend 30- to 60-day payment
terms to customers confidently because you do not need to wait that long to get funds
out of your invoices.
 Easy qualification requirements. Unlike other business financing solutions, factoring
is relatively easy to qualify for. Most companies that have solid customers and do NOT
have major problems should qualify.
 Quick funding. The factoring line can be deployed quickly – usually in a week or two –
allowing you to respond quickly if your company is in a crunch.
 Line flexibility. Since the line is based on your invoices (their dollar amount and
quality), the line can grow and adapt to increasing revenues. This important advantage
provides a financial platform that can support growth.
 Simpler application. Invoice financing has a simpler application process that most
other solutions.

Disadvantages of Factoring
However, invoice financing is not perfect for every company. Factoring has some
disadvantages that you should be aware of so that you can make an informed decision.
Some disadvantages include:

 Cost. The cost of factoring financing is much higher than the cost of other types of
funding.
 Solves a very specific problem. Factoring is designed specifically to address the
cash flow problems created by slow-paying customers. If you have other problems, or if
you need capital to buy equipment, factoring offers little (if any) help.
 Your customers will know. Your customers will know that you are using this type of
financing. They receive a Notice of Assignment advising them of your factoring
relationship.
 Your invoices will be verified. Most factoring companies verify your invoices with
your customers to ensure that they are accurate and that your customers are satisfied
with the products/services.

Conclusion
This article does not provide an exhaustive list of advantages and disadvantages of
factoring invoices. However, it should help you determine whether factoring is the right
solution for your company.