Invoice factoring, or accounts receivable funding, affords small business owners with near immediate access to capital. This arrangement makes it possible for companies to receive outstanding funds much faster than they would through traditional accounts receivable methods. Along with the many benefits, though, factoring does have a few cons. Here is a look at the advantages and disadvantages of factoring.
Factoring Advantages
Using invoice factoring provides many benefits to companies. Some of these include the following:
- You'll be able to increase your working capital almost instantly by getting up to 85 percent of your invoice value in advance.
- Your factoring line will grow along with your business. As your invoice amounts increase so will the total amount you can factor.
- Factoring companies provide you with professional assistance by performing accounts receivable duties such as issuing customer statements, collecting on invoices and keeping records of your client payments.
- Since the factoring company is providing you with the money upfront, you'll be able to use more of your time growing your business and making necessary improvements rather than chasing down customer payments.
- Getting faster access to cash means you won't have to put off making essential purchases or paying your suppliers. You'll also be able to keep up with important expenses such as advertising and payroll.
- Factoring gives you a definite payment schedule which makes it easier for you to make plans for your business. Since you'll know exactly when your payment is coming, you can arrange your affairs well in advance.
- Using a factoring company may help your customers to pay their invoices more efficiently.
- Since you'll get most of your money right away you can use some capital to fund future work or choose to put some away in savings.
Disadvantages of Factoring
Despite the ease and convenience of factoring, there are some cons to using this arrange. These include:
- The factoring company may enforce credit limits for your customers to keep them from owing too much at once and then possibly defaulting later. These credit limits can potentially have an effect on your business.
- If you need to leave the factoring agreement early it may be difficult to do so.
- If a customer disputes the charges on an invoice, you'll need to settle that matter immediately.
- Since you relinquish your accounts receivable responsibilities to the factoring company, you're entirely dependent on them to collect on the invoices and uphold their part of the agreement.
While factoring has both advantages and disadvantages, many companies will find that the benefits far outweigh the risks. If you decide that invoice factoring is right for your business, you'll be able to receive the money you're rightfully due in a timely and efficient manner.
