The Advantages And Disadvantages Of Debt Factoring

What are the advantages of debt factoring?

The advantages of debt factoring are:

• Improved cash flow – Factoring against your accounts receivables releases significant funds to improve your cash flow. This leaves you free to grow your business without being held back by your bank balance.
• Saved time and resources – As credit control is managed by your factoring provider, you can save time and resources chasing payments from your customers.
• It’s fast and flexible – Factoring is a fast and flexible way to borrow money. As the number of invoices raised grows, so too can your invoice finance facility to ensure you always have the cashflow you need to take your business forward.

What are the disadvantages of debt factoring?

The disadvantages are:

• It’s a cashflow solution only – It only funds cash flow, so if you need further funds to purchase equipment or to make a large payment, you may need to also consider asset finance, asset based lending or a business loan.
• You could be responsible if the customer doesn’t pay – If your customer doesn’t pay, your factoring provider will look to get the money back from you. To avoid this, consider the bad debt protection add-on, which means that you still get paid, even if your customer doesn’t settle their invoice.
• You lose control of chasing customers – As credit control passes to your factor, you lose control of your sales ledger and ability to give valued clients breathing space if they need to pay slightly late.
• There is a cost – While it is a low cost finance solution, there is still a cost, meaning your overall profit margin will reduce slightly if you don’t use the improved cashflow as a catalyst to grow your business.

Is debt factoring right for my business?

If you’re a business that operates B2B, on delayed payment terms and require a solution to improve your cashflow, there is a great chance that this finance product will be a good fit.

Whether debt factoring is right for your business will depend on the exact requirements of your business.

For example, if you want to retain control of your sales ledger, then invoice discounting may be a better fit for you.

Equally, if you want a large lump sum, then consider an unsecured business loan, or even a secured business loan for larger amounts.

What are the alternatives to debt factoring?

The correct alternative to debt factoring will depend on the element of debt factoring that doesn’t work for you. The key alternatives based on elements that may be an issue are:

• You don’t want to finance your sales ledger – If you want access to cash when you need it, but don’t want to finance your sales ledger, consider a business overdraft or business revolving credit facility.
• I want to retain credit control – In this situation, invoice finance could be a good solution, but consider confidential invoice discounting, CHOCC or CHOCS invoice finance.
• You need a large lump sum – Property backed finance may be a good solution, so consider a secured business loan or commercial mortgage.