The advantages and disadvantages of factoring and invoice discounting

Advantages of factoring and invoice discounting

Making use of an invoice factoring or discounting service can improve your bottom line and offer your company a whole range of benefits, such as:

  • Improved cash flow by releasing up to 85% of funds against the value of outstanding invoices
  • It gives you access to an ongoing supply of cash that grows as your sales grow
  • In the case of factoring, you work with a dedicated team of professionals who will prepare and send out statements, telephone all of your customers, collect payments for you and maintain professional and detailed accounts of your transactions
  • Management time is freed to drive the business forward as you are no-longer spending time on unpaid accounts and are no-longer held back by insufficient cash flow
  • By making use of a factoring facility you can benefit from improved profitability as you can pay suppliers earlier, buy in larger quantities and take advantage of any volume discounts available
  • Knowing exactly when you are going to be paid assists with financial planning
  • You may find that some customers respect factors and pay their debts more promptly
  • It is possible to protect your company from bad debts if you decide to choose non-recourse factoring
  • You receive cash as soon as orders are invoiced which gives you the option of using it for capital investment and to fund future orders
  • The facility provides flexibility for the business and access to a range of additional products such as cash flow loans, trade or transactional finance

Disadvantages of factoring and invoice discounting

  • The factor will want to set credit limits for customers which may affect the way you trade
  • Exiting the agreement can be difficult
  • Disputed invoices must be dealt with quickly to avoid them being re-coursed
  • In the case of factoring, you are reliant on the factor to collect the debt in a timely and efficient manner

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You may also find our business finance glossary of terms useful.