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The Advantages and Disadvantages of Business Factoring

Aug 15, 2008
If your business gets cash-flow blockages on a regular basis due to a large number of credit clients being on your sales ledger, then you could find a lot of cash constraints affecting the smooth functioning of your business at regular intervals. This could pose a problem, when you might need money to pay your suppliers or employees and would put all your expansion plans on the back burner.

Business factoring is a process, where a factoring company would 'buy' your credit invoices and provide you with immediate cash in exchange for a small factoring fee that could range from 1.5% to 5%. Even though factoring is much more flexible and easy to acquire than a bank loan, there are still some pros and cons that need to be kept in mind, before taking a blind plunge. Here are some advantages and disadvantages of business factoring.

Advantages

The biggest advantage of business factoring is that you get instant cash against your credit invoices. This means that you do not have to painfully bite your nails, as you wait for the due date of your various invoices to arrive. This process thus improves your cash flow and since it depends on the number and amount of invoices that you submit to your factoring company, it will enable you to receive amounts on a regular basis, thus maintaining a positive cash flow at all times. This will enable you to go in for larger orders, make larger purchases, in order to get the benefit of quantity discounts and even pay your employees and suppliers on time.

You might also be able to put your expansion plans into action, which previously might have been stuck due to lack of cash. If you have a non-recourse arrangement with your factoring company, then your factoring company would assume the responsibilities of following up and even collecting the pending payments from your clients on the due date. This could prove to be a boon for your business, since it would enable you to focus your energy towards increasing your sales.

Disadvantages

Since this service comes at a cost, you will first need to examine as to whether your profit margins can take in an additional load of 1.5% to 5%. If your profit margins are already low, then you might not be able to absorb this fee. If you are providing a higher credit period with low margins, then this process might not be suitable for your business. In case you go in for a non-recourse arrangement with the factoring company, then you will also need to check the efficiency of their collection staff. They will have to be polite, while asking for the due payments. Your clients will also need to be told of your new arrangement and some of them might not be comfortable with it. You could also lose a few clients in this process. A factoring company might not be as accommodating as you were and could be very aggressive, while pursuing your payments.

Thus, you should look at both sides of the factoring coin, before you make up your mind. Even though there are many advantages to factoring, there are other factors that are bound to affect your profitability and might also affect your relations with your clients. Therefore, you should examine your business model, your profit margins and the relationship with your clients, before you think about utilizing the services of a factoring company.
About the Author
Freight Factoring Company Phoenix Capital group is a one stop transportation services company. Freight Shipments and related Factor Growth has increased in the USA as shown. To learn more or to start your Freight Factoring visit: http://www.phoenixcapitalgroup.com
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