Pros and Cons of Accounts Receivable Factoring

 

Every business financing option has its own set of benefits and disadvantages; invoice factoring is no different.  Some of the more prominent benefits of utilizing a factoring service include:

  • Receivable factoring allows you to get money for your business right away, generally within two to five days and sometimes within twenty-four hours if the factor offers online invoicing.
  • You can potentially qualify for more up-front funds through factoring than you would receive through a small business loan.
  • You alleviate yourself of extra work by outsourcing your accounts receivable collections to somebody else. 
  • Industries that find it difficult to receive funding through traditional means may be able to receive the advances they need accounts receivable loans.

Of course factoring is not a perfect solution in all situations and for all businesses.  There are some potential downsides to this business funding option:

  • If you have slow-paying clients or some of your clients have less-than-stellar credit, this can affect the discount rate that you pay to the factoring company.
  • If your clients prove to be unreliable or do not meet a factor’s standards, you may receive a lower percentage up front, or it may even cause you to be ineligible for funding through this method.
  • Factors are also not collection agencies so if a client fails to pay their outstanding balance by a predetermined date, or they fail to pay altogether, this will likely increase the amount of money that you owe a factor in addition to adding to your current workload.

 

 

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