Factoring & Invoice Discounting - The Disadvantages of Factoring.
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The Disadvantages
Rushing into a factoring deal, not being truthful or not keeping your companies interest at heart can tie you into a factoring deal that could have an adverse affect on your business, if you need factoring you are probably in a precarious position anyway, so doing your research properly or by using a competent factoring broker can make you agreement much more successful.
Customers & Sales
In most cases the factor will take control over your sales ledger (books). This can be a bit awkward as you may have a personable relationship with your customer who now has to deal with your "unknown" factor, in some cases your customer may assume that your business is in trouble and may not want to trade with you. With careful discussion with your factor you can explain your customers method of payments and collection, and providing they have a good credit history their billing terms can remain unchanged.
Regulation of your business
the way you do business may be affected by factoring, because some factors will want to asses your customers creditworthiness and apply credit limits to that company especially if they have delayed payments or have outstanding invoices, this is typical of Non-recourse factoring which protects your business against bad debts ( the factor has recourse to cover any outstanding debts).
If your company is is not sufficiently large enough to qualify for invoice discounting, a debt collection service will seem your only real benefit. companies that have an annual turnover of at £500,000 or more can qualify for invoice discounting, meaning your are in control of tracing and recovering outstanding invoices.
Get me Out!!!
Most deals made by factors tie you into a deal for at least 12 months in most cases, repurchasing your sales ledger or changing factors (like a re-mortgage) can be the only effective route when it comes to ending a factoring agreement.
No more Factoring
If and when your factoring deal ends be sure that your company can replace it's working capital for the first initial period, getting used to frequent payments from your factor can breed apathy, you may need to find an alternative form of funding in the early post-factoring days.
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