5. Pros and Cons of Factoring Services

  1. There are some definite pros and cons to using factoring services.  On one hand, you can have access to quick cash at relatively low rates compared to other alternative financing options, such as merchant cash advance transactions.  On the other hand, factoring can be risky and expensive in some cases.  Here are a few things to consider:

    • Factoring gives you access to the money you need.  You’ll usually be able to get an advance within a few days of your application, with much less hassle and wait than would accompany a traditional bank loan.

    • It’s easy to qualify.  Factoring doesn’t show up on your credit report as a loan or obligation, and many companies will not check your credit at all- they’re more interested in your customers’ credit history.  It’s easier to qualify for a factoring transaction than it is to seek other methods of financing.

    • It’s a way to outsource.  If you spend tons of time on collection functions, it might be worth it to pay someone else to perform these tasks.  This is what a factor does- collect customer payments on your behalf.

    However, factoring business invoices isn’t the best solution for everyone. Some potential drawbacks to this type of business funding:

    • It can be expensive.  If clients don’t have good credit, or make late payments on their account, you could end up paying more for than you would for other types of funding.

    • It can be unpredictable.  Many factoring companies keep contract terms vague, where they can adjust fee amounts based on whether or not customers pay on time- or at all.  If your customers default, you cold be liable for penalties, fees, or even face legal action.

    • Factors can be picky.  In order to get reasonable rates, you need to make sure your customers have solid financial histories and good credit references.  You also need to have invoice balances exceeding certain amounts.


    It’s a good idea to weigh the pros and cons when deciding whether or not using a factoring service.  Though factoring can be a great financial solution, it is not right for everyone.  Make sure you consider all aspects of accounts receivable factoring before making a decision.

     

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