What are the advantages and disadvantages of Factoring?

You’ve been running your business a while, or maybe you’ve just started one and you’re finding regular cash flow is a problem, as you wait for invoices to be paid.

You’ve got great customers – creditworthy, consistent payers, but you’re experiencing pressure on the finances in the time between you issuing the invoice and receiving payment.

While you wait for payment, you need to find the cash to pay off your own suppliers or staff. This means you might have to make a choice over dipping into your savings, using your overdraft or applying for a bank loan to tide you over until you’re paid. Applying for an overdraft, loan or credit card to bridge the cash flow gap adds debt to your business.

Working like this, invoice to invoice is not ideal because it doesn’t allow you space to invest in new customer acquisitions.

Factoring your invoices allows you to better manage cash flow in your business, without adding to your debt profile.

It’s not for everyone – there are fees to be paid and you need to be creditworthy and have creditworthy customers to be considered. You don’t receive the entire amount of your invoice upfront, but you do receive most of the cash a lot faster than if you were waiting for your customer to pay.

There’s an advantage here that helps you manage your business better. Knowing that you’ll receive payments in a timely manner, means you can ask for favourable, early payment discounts from your suppliers.

Having a regular cash flow allows you to plan better marketing initiatives; buy essential kit and employ more staff to keep up with demand. Having peace of mind, means you can focus on the strategic side of developing your business, instead of chasing payments.

Factoring organisations offer flexible approaches – some take on your entire collections portfolio, by issuing invoices and collecting payments. Others allow you to issue the invoice, but they take control of the collections. Ask what options they offer when you first enquire.

Invoice Factoring works by ensuring you receive payment, usually within 24 hours of your invoice being issued – much better than waiting for 30 to 90 days, depending on your customer payment terms.

Like any decision to be made, you want to have the full facts. Here we look at the Factoring advantages and disadvantages.

Advantages of Factoring

  • You get access to your cash, usually within 24 hours of issuing your invoice
  • You can organise preferential payment terms for your suppliers, knowing you’ll receive faster payments from your Factoring organisation
  • Utilising the value within your sales ledger means your capital assets remain untouched
  • Working with a Factoring organisation means you get a better understanding of the creditworthiness of your customers resulting in you offering better payment terms to win their business
  • Factoring organisations want to help you if they can – they deal in facts. They’re looking at your expertise, creditworthiness and the quality of your customer pipeline, even if you have bankruptcy in your past
  • The amount you factor grows as the number of invoices grow. The amount you can access is tied to the number of invoices issued so there’s no administration needed to apply for further credit
  • You can factor invoices on a short-term basis if you identify a specific need, maybe seasonal – make sure you discuss this upfront with the Factoring provider
  • Your invoices are your assets – there is no need to offer property or equipment as collateral
  • No Factoring organisation will ask for equity. You retain control of your business and how you operate
  • You don’t need to be a huge business to access invoice Factoring

Disadvantages of Factoring

  • There is a financial cost with Factoring. Make sure you know what added value a factoring organisation can offer you
  • Invoice Factoring is best used to balance cash flow in your business so shouldn’t be seen as something you can use to solve other cash issues
  • The administration involved can require time and attention – some factoring organisations enable you to do all of this online which speeds up the process – ask when you enquire
  • Factoring providers may contact your customers to let them know they are managing your invoices, but this is not always the case. You can state how you prefer to work and retain control of your customer communication
  • Ensure the factoring organisation understands your approach to working with customers if you’ve agreed they will handle customer communication
  • Make sure you understand upfront any clauses for exiting the agreement
  • Whatever your decision, be realistic. Think about how efficient your collections process is already and what value working with a factoring organisation will add to your business. Not all invoice Factoring providers will offer you the same added value
  • Costs may seem a challenge to begin with but think about the long-term; the fact you may be able to negotiate better supplier discounts which will negate the costs of invoice Factoring. And you can enhance customer relationships because you know when and how you’ll receive monies owed

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How we can help you

Bibby Financial Services offers a variety of Factoring and other business funding solutions.

To find out how we can add value to your business, get in touch today.


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Speak to one of our team today on 01-297-4911