Debt factoring advantages and disadvantages

Debt factoring can be a complicated process - find out about the benefits and advantages, and then find the service that's right for you

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Debt factoring can supercharge your business – and lets you get swift access to the cash that’s tied up in unpaid invoices.

However, it’s not the right choice for every small business and there are some important things you need to consider before signing up.

Here are the key pros and cons of debt factoring at a glance:

Pros
  • Boost your cash flow
  • Cost effective administration
  • Bad debt protection (optional)
Cons
  • Cost of factoring
  • Factoring company may want to influence business decisions
  • Potential loss of control over the invoice process

One of the simplest ways to understand if debt factoring is right for your business is to understand the costs and fees associated. With our quick comparison form, you can get zero-obligation free quotes. Just select the features that reflect the needs of your business to get comparable, tailored costs.

Or, continue reading for in-depth insight into the advantages and disadvantages of debt factoring.

Compare debt factoring costs now Are you working with a debt factoring company?

Debt factoring advantages

Invoice factoring offers businesses a range of viable benefits – such as improved cash flow, debt protection, and quick purchasing – that should be considered carefully during the decision making process. These benefits can help your business to grow, and can significantly reduce your reliance on upcoming payments.

The list below includes a range of advantages offered by invoice factoring – take a look at the following sections for more information about each benefit (click on the links to jump to each section).

The main advantages of debt factoring are:


Improved cash flow

Primarily, the goal of factoring, and therefore the key advantage, is swiftly raising cash. It is a way of getting the money your customers owe you, without waiting for them to actually complete the transaction.

Although you will be expected to sell the invoices for a discount, this needs to be considered in the wider context. You won’t be losing time, money or resource on administering and processing invoices.

Start-ups, small businesses, and entrepreneurs need cash injections to help them grow. It can be the difference between seizing an opportunity and allowing for expansion, versus stagnating and losing out. Therefore, receiving cash injection to improve cash flow is the key advantage of debt factoring. You could have cash in your hand within just a day or two.

Shorten the cash flow cycle

Many smaller businesses struggle because of the expected and normalised time between work or order completion, and the payment being made. This time lag can pose significant knock-on problems. One of the advantages of debt factoring is that it can shorten that cycle, and get payment into your hands sooner.

Ability to make quick purchase decisions

If you urgently need to make supply purchases, make repairs, or get new equipment, factoring is an excellent way to release the required funds.

Rapid expansion

Should you be presented with the opportunity to take on a new client or a large order or project, you may need to quickly expand in terms of staff and capacity. Debt factoring can boost your working capital.

Taking the business to the next level

Entrepreneurial businesses can be hampered by their inability to create new product lines or offer additional services, which will ultimately benefit the bottom line, because they simply do not have the cash available.

Bad debt protection

One of the key advantages of factoring is that it takes some of the risk of bad debts out of your hands. To do this you will need to choose non-recourse factoring, and this will be reflected in the ‘discount’ – where you will pay higher factoring fees as you are mitigating all risk. However, this protects your business from any loss if a debtor does not pay.

Cost effective administration

Smaller businesses, where staff tend to take on several roles, can quickly find that financial administration becomes a time-consuming and resource-eating task that does not pay. By handing over the administration of the invoice to the debt factor it will free up valuable labour time which can be used grow the business. This can also prove worthwhile to your bottom line by reducing significant administration overheads.

Debt collection cost effectiveness

Should you be in the position of needing to get debt collectors on board, you will be paying a hefty fee, often considerably higher than 20% of the value of the debt. With factoring, the fees are significantly less and the factoring company will take care of unpaid invoice collections. To get more information on pricing and charges, visit our invoice factoring costs page.

Peace of mind

As a business owner, debt factoring can bring peace of mind that your cash requirements will be met, and that you are in a position to meet the needs of your business.

Viable finance option

For those businesses that are unable to attain a bank loan, debt factoring is a viable finance solution.


Invoice Factoring Benefits


Debt factoring disadvantages

Alongside the advantages of debt factoring there are some notable disadvantages of factoring to take into consideration.

The disadvantages of invoice factoring can include:


Slightly reduced the bottom line

Ultimately, debt factoring companies charge you factoring fees for taking on the risk and collecting the payment of unpaid invoices. As a result, you stand to make a reduced amount from your invoices. However, the benefits of debt factoring far outweigh this small loss.

Some business power is given to a third party

Factoring companies tend to have certain expectations about the way businesses are run. Generally speaking, they are not big risk takers. Therefore, they may insist you change the way you do things, including the types of customers you have or even staff you have on board.

Customer service and reputation

As a business owner, you will understand the vital importance of maintaining an excellent reputation with your customers. One of the disadvantages of factoring is that you lose control over the invoice payment process, and a customer might not like the way your chosen factoring company go about their payment collections.

However, there are options available whereby the invoice factoring company’s involvement can be managed effectively to maintain good relations with your clients. In some cases the involvement of the factoring company can almost be disguised.

Possible liability for bad debt

It will depend on the terms of your factoring agreement, but under some agreements (such as recourse factoring arrangements), unpaid invoices can come back in your direction. This is particularly important to note if you have a large number of invoices due from customers with poor credit ratings.

However, you are able to mitigate the risk of this by effectively managing the type of invoices that you factor. For example, it may be best not to factor invoices from a client that has a very bad credit rating. Invoice factoring companies will work with you to identify the best invoices to factor which mitigate risk for both you and them.


Considering the advantages and disadvantages of factoring

When you consider whether debt factoring will work for your business, it is important to consider the advantages and disadvantages of factoring. You must do this before signing any debt factoring agreement.

Understanding the advantages and disadvantages of factoring puts you in a much better position for negotiation, and indeed maximising the advantages of factoring for your business.


Choosing the best invoice factoring company

The information on this page should help you to understand what sort of benefit invoice factoring can offer your business. For even more information, including comparisons of top UK provider, you should speak to experts today – we can help here.

To get in touch with up to four top-quality invoice factors, simply complete the form with a few quick questions about your business at the top of this page. This process is free, quick and easy, and it could save your business both time and money.

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Bryn Glover has been Editor of Startups.co.uk since 2017. Running the site's content strategy, Bryn spends a lot of time speaking to entrepreneurs and preparing for Startups' annual editorial campaigns.

Having worked in journalism for just under a decade, Bryn wrote for sites like The Times, Reader's Digest, Independent and Times Higher Education before moving into the small business world.

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