There are both advantages and disadvantages for every business financing option, and invoice factoring is no exception. As always, it is important to weigh out all of your options before you make your decision. Some businesses may benefit more than others by choosing to use factoring services, while others may benefit by seeking help from alternative means.
Some of the more prominent benefits of utilizing a factoring service include:
Opportunities for financial advances - Factoring loans may provide the opportunity for financial advances to industries that find it difficult to receive funding through traditional means.
Quick access to funding - Accounts receivable loans allows you to get money for your business right away, generally within two to five days. If the factor offers online invoicing, it is possible to receive your money within twenty-four hours, which can be very helpful if your business is in need of quick financial assistance.
Avoiding extra work - By choosing a factoring service, you avoid giving yourself extra work by outsourcing your accounts receivable collections to somebody else. This will allow you to focus on your current workload without becoming distracted or falling behind.
Qualifying for more funding - You may be able to qualify for more up-front funds through factoring than you would receive through a small business loan.
Factoring, however, may not be a perfect solution in all situations and for all businesses and there are, of course, some potential downsides to this business funding option as well.
If your business has slow-paying clients, or some of your clients have fair credit, this can affect the discount rate that you pay to the factoring company. If your clients prove to be unreliable or do not meet a factors standards, you may also receive a lower percentage up front, or it may even cause you to be ineligible for funding through this method.
In addition, factors are not collection agencies, so if a client fails to pay their outstanding balance by a predetermined date, or they fail to pay altogether, this will likely increase the amount of money that you owe a factor in addition to adding to your current workload.
Before you consider factoring as an option, make sure you are aware of your clients payment patterns.Though factoring services can be beneficial for certain businesses, it may not be the best decision for you if you cannot rely on your clients.