Disadvantages of Factoring Invoices

As a factoring company, we obviously believe that factoring financing is a great product with numerous advantages. However, factoring financing is not right for everybody, and, like any product, it is not perfect.

This article helps you understand some of the most common disadvantages of factoring financing so that you can decide if it is the right solution for your business.

  • The cost. Factoring financing is not the cheapest form of business financing. In fact, it can be an expensive way to finance a business, so it should be used only by companies with profit margins sufficient to cover the cost of financing.
  • It only solves one problem. Another disadvantage of factoring is that it can only solve one problem: cash flow problems created by slow-paying customers. It won’t help if your company needs funding for other reasons, such as buying capital equipment or real estate.
  • It’s labor intensive. Once your financing line is in place, you need to send funding requests to the factoring company every time you need an advance. This process usually requires filling out a form and compiling the invoices that you want funded. Depending on your business, this method can involve some paperwork and take some time. Many companies perform these tasks weekly.
  • It requires third-party contact with your customers. The financing relationship is not invisible to your customers. Initially, the factor sends your customers a notice of assignment to advise them of the relationship. Additionally, the factoring company contacts your customers regularly to verify that they are satisfied with your services and to ensure that the invoices are accurate. While most companies are comfortable with this practice, many prospects worry about having a factoring company contacting their customers on a regular basis.

By the way, we are not trying to dissuade you from this type of funding. Factoring financing can be a great tool for companies with working capital problems because customers are taking too long to pay. And, as opposed to many other business financing products, it can be set up quickly and the line can be increased with relative ease.

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