Partner Article

Pros and Cons of Factoring Your Company

If cash flow has become tight for the business, there is the option to factor the company invoices. This involves gaining an advancement from companies for invoices that you will raise in the future. It is possible to gain as much as 85% of the invoice totals through this option. There are advantages and disadvantages of factoring invoices and it is worth considering both before deciding that this is the best thing for your business.

Improve Your Cash Flow

The biggest benefit is that you are able to improve your cash flow. While you are waiting for the money from the unpaid invoices, you will still have something coming in to spend on your business outgoings. It is like gaining an advance on your allowance or on your pay. You work with invoice discounting firms where they give you an advance on the amount that you can prove you have coming in.

This can help you afford your regular business outgoings or to afford an expansion to help your business expand. There is no need to give a reason for factoring your company’s invoices and you will be able to use the money as you require.

Chase Bad Debts

Some factoring companies also offer a bad debt chasing facility. This will help you improve the amount of time you have to spend on the business and avoid the risk of writing off invoices. You will be able to concentrate on other areas of your business and not need to worry about whether you will receive the pay. Your staff will be able to concentrate on making more money for the company instead of chasing up payments from customers.

Not all factoring companies will offer this so it is important to shop around. You may find that there is an additional cost but this will work out to be a benefit if it comes to chancing up invoices. Also, by taking this service, you will make sure that you can stick to the agreement even if customers will not pay their invoices.

Taking the Bad Debts

Other factoring companies offer to take on the bad debts instead of putting you into bad debt if there are unpaid invoices. You will be able to move on and not have to worry about paying the company back. This is described as a non-recourse but is not available from all companies.

The factoring companies will chase up the customers and keep the money themselves. You will not receive a penny but the money you own the factoring company will not need to be paid. Your business has extra protection.

Expensive for the Business

There are extra costs when handling with factoring companies. These companies will charge an interest on the money that you borrow and a settlement fee. This means that you spend more than you would gain from the invoices. It is important to find out the full amount that you will end up paying as you could find that it hinders your cash flow in the long run.

The extra costs can be extremely high if you opt for a company that offers cashing the bad debt or taking on the debt themselves. This will be there to protect themselves due to the risk of extra fees to chase up the money and the extra fees should debt recovery companies become necessary. This leads to smaller profits for your business.

Waste Money to Damage Relationships

There will be times that the customers need to deal with you directly. The factoring company will be left with being unable to do anything extra while you handle the problem. The factoring companies do not know the way that your business works and will be unable to handle disputes on your behalf.

You will be paying money for the extra service but having to do all the work yourself, which is a waste of money and your time. You may as well chase up the money yourself.

You also run the risk of damaging relationships with your customers. The factoring companies will not be interested in the relationship between you and the company; chasing bad debt is the only concern. This leads to heavy handed tactics and the use of debt recovery companies as a way to gain the money back. Your customers may not realise that you are using a third-party or may resent the fact that you have passed it onto a third-party and will go elsewhere for their business. Taking the time to do the chasing up yourself will mean that you can nurture the relationship at the same time unless you have no other option.

Change the Way Your Business Runs

There are terms, conditions and contracts that you will have to agree to when using factoring. These terms change between various companies but they can have an effect on the way your business is able to run. You may have to change the way you offer your invoices or how your financial information is prepared and recorded.

This could change too much for your customers and they start to leave because of the changes. This is especially the case if it directly affects them. You may also find that you are limited in the way that you spend the money for your business so it is important to check the terms before opting for any company.

You may want an instant fix for your cash flow problems and factoring your company’s invoices may be able to offer that. However, it is important to look into the pros and cons. While gaining an advance on your invoices could help to free up that money to use within the business, you need to think about the risk of not gaining the money for those invoices or the extra money needed to pay for the service. It is important that you are happy with the way that the company will handle your customers, with the terms and conditions set out and that your time will not be wasted with disputes.

This was posted in Bdaily's Members' News section by Jake Hall .