Factoring is a quick and easy way to replenish your business with urgently needed cash in quickest possible time. However, this financing option is not all hassle free and has its disadvantages too.
The pros and cons of factoring
Advantages:
- It is among the quickest way to get advance cash. - Overhead charges get automatically reduced with the cut in invoice processing activities.
- The business owner becomes free of various other obligations connected with the invoice processing like depositing checks and entering payments.
- Getting cash with factoring helps in eliminating the risks of bad debts.
- By undertaking the task of debt collection it helps the company in concentrating over more value added activities.
- Without acting as hindrance to cash flow it gives an opportunity to offer credit terms to customers.
- Factoring brings no extra liability in balance sheet and hence does not result in creating hassles while obtaining other types of financing.
- Early payment discount is another benefit of factoring. Payment of bills before the scheduled time brings in many benefits in the form of discounts.
- It is an easy way to have an access to unlimited capital as with an increase in sale more money becomes immediately available to business owners.
Some other benefits include building credit, quick and easy process, concentration on marketing and securing new accounts and no long-term obligation.
Disadvantages:
- The biggest disadvantage is it makes the process complicated as it acts as an extra link in the process.
- It is useful for companies with disputes and queries.
- The ambit for borrowing gets narrowed, as account receivables will not be available for security.
- Factors may want to get your customers examined and may have influence over your ways of doing business.
- In case the customers do not repay the money, you have to pay their amount entwined in factoring.
- It is costly than other sources of finance though it is competitively priced.
- Few customers don’t want to deal with a third party and are not interested in factoring.
Learn more about factoring / business finance: http://www.hjventures.com/factoring/factoring-glossary.html
About the Author:
Howard Schwartz is a partner in several business strategy groups, including HJ Ventures International, Inc. Howard has worked with hundreds of entrepreneurs worldwide with a focus on writing Business Plans for companies interested in raising capital from Venture Funds and Angel Investors. Howard’s business plans have secured several million dollars in funding. For more information: http://www.hjventures.com/factoring/factoring-glossary.html
tweet this!