Weighing Up The Pros And Cons Of Factoring ReceivablesFactoring is the purchase of accounts receivables at a discount in order that the supplier/creditor can receive their cash straight away.A business will consider factoring receivables when facing a period of cashflow problems. The pros and cons of factoring need to be considered and evaluated before entering into a factoring finance arrangement - even if it is with a reputable company. Pros and Cons of Factoring - The ProsFactoring is one of the quickest way to produce a cash inflow into a business.
Administrative costs to the business are reduced as all collections activity is undertaken by the factoring company. Time costs are reduced in sales transaction and invoice processing. The invoice is produced, factored and filed. All other activities are carried out by the factoring company. The business no longer carries the risk of bad debts and defaulting debtors. The factoring company carries this burden. The company does not have to fall out with any customers over unpaid bills! As far as the company is concerned, they have been paid. (It is worth noting that a future invoice may not be considered for factoring if a debtor defaults). Having access to the factoring company for credit checking of customers enables the supplying company to make good credit decisions on more customers.Factoring does not create any balance sheet liabilities so it does not offend investors and other business stakeholders. It is an inexpensive way of providing working capital to the business without high interest rates being charged. Many businesses who are unable to raise finance in the normal manner, because of poor credit history, can still raise money through factoring schemes as the credit rating that matters is that of their customers. Factoring is a method of financing available to organizations that are considered as high risk. Pros and Cons of Factoring - The Cons Setting up a factoring arrangement means opening up the business to outside scrutiny. New operating procedures may be inflicted on the organization. Once the accounts receivables have been factored they are no longer an asset on the balance sheet and cannot be offered as security against borrowing. Some regular, loyal customers may not pass the rigorous credit checks undertaken by the factoring company. It can send the wrong message to customers regarding the stability of the company. Some customers view factor companies as collection agencies (which of course they do become) and will choose not to trade with the business any more. Factoring represents an additional cost to the business. Factoring may not be available to businesses with a low turnover or that produces large numbers of invoices for small amounts. Is not available to the retail sector Can be expensive - creditors should shop around for the best deals Any business manager considering factoring his accounts receivables will need to think about whether this method of business financing is right for him and his business at this moment in time. It is important to explore all options, even when the need for cash is pressing. The temptation can be to make a hasty decision when facing cashflow problems but this may not always be the best decision. |