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Invoice Factoring Resource International An information and solution resource |
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Drawbacks of Invoice Factoring?
Invoice factoring, thus far, seems to have a lot of benefits. But what are the downsides of factoring? As you probably guess already, there are some pitfalls that you should carefully consider before you decide to start factoring your invoices.
Factoring can be addictive Once a company starts invoice factoring, it often finds it difficult to stop. Instant cash is addictive to small business. Once you start factoring your receivables you may find it hard to live without it. By using invoice factoring you can transform your business to a COD business in about 30 to 60 days. The operative question is why would a company want to stop factoring after it starts? Just as there are some good reasons to start factoring, there are some good reasons to stop factoring.
Factoring can be expensive Factoring in general is quite a competitive industry. So the costs are relatively low. The cost is generally between 1-3% of the invoice if the customer pays within 30 days and depending on whether the factor has recourse in the event that your customer is unwilling or unable to pay. That may not seem like a lot of money, but over the course of a year it could prove to be quite a bit more expensive than other forms of financing. If your company grows to the point that conventional financing becomes an option, then debt instruments such as a line of credit may result in lower total interest cost than you are paying in factoring discounts.
Factoring may delay conventional forms of financing If your goal is to obtain conventional bank financing, the be aware that the bank is just as interested in your accounts receivable as the factoring company . The bank places great weight on your company's accounts receivable when making the final lending decision. If all your accounts receivable have been factored, they bank cannot consider them as part of its lending decision because you no longer own them. This could result in the bank rejecting your loan application because banks are reluctant to subordinate its position in one of the most liquid assets your company owns.
Factoring can be intrusive The factoring company will purchase your accounts receivable based on the financial strength of your customers. The factoring company will require your customers to provide it with financial information. This is often met with resistance from your customers. In some cases the factoring company may exert influence on the way you do business in order to mitigate some risks that it sees in the composition of your accounts receivable.
Factoring can be confusing Invoice factoring may confuse your customers. The resolution of disputes, questions, and the application of credits may confuse both you and your customers. The resolution of disputes is further complicated by the fact that you may have already been paid for a disputed invoice. That means the dispute must also be resolved with the factoring company.
Factoring can be stigmatizing Some of your customers may not like the hassle of sending payments to a third party. Although most factoring companies vigorously deny it, your customers may view your utilization of a factoring company as a sign of financial weakness, and that may have a negative impact on their purchasing decisions. Your customers may not be as willing to include your company when they are soliciting bids and quotes because of a perceived impairment in your company's financial stability. |
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The purpose of this site is to provide general information about issues involving invoice factoring. This site is not intended to substitute for professional financial or legal advice but instead is a general interest site where people can learn more about issues involving the subject matter. Copyright IFRI 2006 - Invoice Factoring |
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