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Invoice Factoring - Advantages & Disadvantages

Invoice factoring provides many advantages for companies - particularly small and medium sized businesses - that require help collecting invoices and accessing funds. Not all businesses will benefit from the process, however.

You should closely analyse any invoice factoring contract before signing, so that you are fully aware of the potential advantages and disadvantages.

Access To Funds
It Can
Affect The Way You Operate
Customer Payments
Are Reliant On The Factor
Re-Investment Opportunities
Can Be Problematic
Are Binding
Informed Planning
Debt Protection
Late Payment Fines
Buying Discounts

Invoice Factoring Advantages

Many companies will find factoring to be of great benefit to their business but not all advantages will be apparent at first glance. The key benefits include:

Quicker Access To Funds

Studies have shown that, in some cases, invoice payments can be delayed for as long as 2-3 months. Yet even a hold-up of a week, which is relatively fast, means a business is unable to fully access its own funds. Without a doubt, the key advantage of employing invoice factoring is the ability to get access to funds within 24 hours.

Swifter Customer Payments

Most businesses cannot afford to run a fully functioning financial department to ensure that debts are paid on time. Research has shown that by employing the services of a professional factoring company, customers are more likely to pay outstanding debts in a timely manner, leading to faster payments and a more efficient cash flow.

More Re-Investment Opportunities

A stunted cash flow can cause problems for businesses of any size and it can be particularly difficult for smaller companies to grow without the opportunity of re-investment. By freeing up funds quickly with invoice factoring, even the smallest of businesses are able to increase profitability in both the short and long term.

invoice factoring advantages

Improved Efficiency

Chasing funds and payments can be an enormously time consuming process and unless you are well versed in the practice, it can be a frustrating and fruitless one. By effectively out sourcing debt collection, you and your staff can focus your skills on the day-to-day running of the company.

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More Informed Planning

Receiving payment from your customers is an unreliable process at the best of times and can lead to problems relating to financial planning. Factoring companies guarantee timely payments, which allows for better planning, fewer risks and greater peace of mind.

Bad Debt Protection

Insolvent and unresponsive clients are unfortunately a fact of life but these bad debts can cripple a business’ capability to function to its full capacity. By employing the services of a non-recourse factoring company, these risks are all but eliminated as the factor assumes responsibility for all bad debts.

Avoiding Late Payment Fines

When cash flow is hampered, your capacity to pay your own debts can lead to unnecessary expenses, such as late payment fines. This can be extremely frustrating when you are waiting for your own funds to clear. Factoring companies can eliminate these kinds of preventable expenses by providing a cash flow injection.

Bulk Buying Discounts

Most suppliers offer bulk discounts on products and supplies but without the funds to take advantage of these offers, you could be wasting money unnecessarily. Over time this can grow to a substantial amount and can even lead to depleted supplies. Invoice factoring can therefore be hugely beneficial in the long term by allowing for large scale purchases and the discounts associated with them.

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Invoice Factoring Disadvantages

Factoring advantages and disadvantages will depend on a number of circumstances, so it can be dangerous to assume that the service will be suitable for every business. The most common disadvantages are:

It Can Affect The Way You Operate

The factor will set a maximum level limit for their customers, which, can be restrictive for some businesses. This can be avoided by making sure you understand the terms and conditions of the service before you sign the contract.

You Are Reliant On The Factor

Although the factor should be an advantage when it comes to recovering debts, some less dependable companies can actually be a hindrance. Ensuring you are employing the services of a reputable company will help avoid issues of this kind.

Disputes Can Be Problematic

While most transactions with your factor will be straightforward, some can be quite complex. This is especially true if matters relate to a third party, such as your customers. Making sure you fully understand the terms of the contract will help avoid these issues.

Contracts Are Binding

Although single invoice factoring services are available, most factoring companies will require a longer contract before they will release any funds. Any factoring contract should therefore be tailored to your business’ potential. A factor should not only allow for such development, it should be able to offer advice and services to increase your potential.

Which Businesses Are Best Suited To Invoice Factoring?

Regardless of the advantages and disadvantages, all small and medium sized businesses can utilise an invoice factoring facility to some degree. In fact, the smaller the business, the more likely they will require invoice factoring. Unfortunately there will usually be a minimum annual turnover amount that will exclude them from using it.

Large businesses will typically be better suited to discounting services as they typically have their own finance department and will usually only need to access the cash flow advantages of the factoring service.

Businesses that get the most out of factoring will be those that need to unload bad debts and access funds for re-investment. This helps improve profits and offers the advantage of accurate future planning.

Next Steps

For more information on invoice and debt factoring, why not have a look at our comprehensive Expert Market UK invoice factoring guide, which tells you everything you need to know about the subject. Or if you want to know more about the companies that provide factoring and financing services, you should have a look at the UK's top 10 invoice financing companies. Otherwise, just complete the form at the bottom of the page and you can compare quotes and suppliers for business today.