Invoice Factoring Pros & Cons

Invoice factoring is a kind of invoice financing, only with a twist. An invoice factoring company will buy the accounts receivables that your customers owe you and collect it from your customers.

Invoice factoring is selling your invoices (accounts receivables) to a third party or a factoring company to reduce debt and improve cash flow. Businesses that use invoice factoring see an immediate boost in cash flow. Independent finance providers or banks provide invoice factoring. Invoice factoring for small businesses helps the company to grow and develop. 

 

Invoice factoring services provide a solution to cash flow problems. It provides short term capital by assigning and selling invoices to a factoring company or factor. The factoring companies usually give 70-90% of the invoice value in advance. Invoice factoring is an excellent option for businesses and companies that need access to cash quickly but are not able to secure a traditional bank loan.

 

The lender will pay you a part of the total unpaid invoice amount upfront with invoice factoring. Then they will take the responsibility to collect the full amount from your customers. They will advance you the difference, keeping an agreed-upon fee for their services once they collect the full amount. In this scenario, you will not deal with your customers, but the factoring company you choose.

 

INVOICE FACTORING PROS AND CONS?

There are various pros and cons to invoice factoring.

Pros:

Invoice factoring can give you access to cash quickly.

It is easy to get approval for invoice factoring.

It is an ongoing cash-flow process; it doesn’t have to be a one-time financing option.

The factoring companies look at the payment history of your customers, giving you a better chance of approval.

There is no kind of collateral required.

Better client relationships

These are some of the advantages and pros of invoice factoring.

 

Cons:

The fees associated with invoice factoring can be limited.

You will be responsible to pay the unpaid invoices if you are under the recourse invoice factoring agreement. This is one of the major disadvantages of invoice factoring.

The factoring companies might not take on your invoices if your clients have a habit of not paying you on time.

Factoring companies have access to the invoices of your company.

There is a dependency on customers.

The fees and rates associated with this kind of funding can be limiting.


These are some of the disadvantages and cons of invoice factoring. There are several types of invoice factoring. In recourse factoring, the business or the company is liable to pay back and is responsible for any risks.

In non-recourse factoring, the factor or the factoring company is liable and responsible for unpaid invoices.

Another type of factoring is undisclosed or confidential factoring. The customer does not know about a third party or factoring arrangement.

Some other types of invoice factoring are advance factoring, maturing factoring, bank participation factoring, full factoring, domestic and cross-border factoring, suppliers guarantee factoring, etc. You need to have proper knowledge about which factoring would benefit your business.