The advantages and Disadvantages of Invoice Financing
Not for Everyone
Invoice factoring is not for everyone. In the right circumstances invoice factoring can provide some great benefits and advantages however there are some quite distinct drawbacks to using invoice factoring that should always be considered.
The main Pro’s
Immediate Release of Cash.
Probably the main advantage and biggest reason why companies use invoice factoring is the ability to realise cash immediately after an invoice is issued. If you imagine a company with £200,000 of outstanding invoices it may be that they could receive £150,000 of this money within days of setting up an invoice factoring agreement. This can be a huge boost for cash flow and especially useful where a business is looking to expand and grow.
Protection against Bad Debts
In some cases, depending on the invoice factoring agreement, there will be a provision for Bad Debts. This is particularly useful when the local or global economy is in a slump and when the likelihood of a customer closing or liquidating is higher.
Easier Planning for Business Growth
Planning the growth of any business can be difficult enough at the best of times. The advantage of knowing exactly when invoices will be paid allows companies to plan their growth more efficiently and accurately.
Credit Check Information
Most factoring companies will run a credit check through one of the usual agencies to determine the credit worthiness of that customer. In a lot of cases this information will be shared with the supplier which will increase their knowledge of that customer.
Stronger Supplier Negotiations
If a supplier knows that their customer receives their payments from a factoring company it may be that this quick payment can be passed on and therefore become a useful bargaining tool to negotiate better rates of supply.
Improved Cash Flow
Factoring almost certainly improves the cash flow of a business. It ensures the majority of the monies owed are in the company’s account within days of an invoice being issued.
Improved Respect
Customers sometimes hold more respect for large factoring companies and in turn are quicker to pay their bills. This can be an advantage for a smaller business that may be in danger of not being taken seriously when chasing invoice payments themselves.
Outsourced Sales Ledger
Invoice factoring can be a very efficient and cost effective way to manage a company’s sales ledger. Instead of employing a team of administrators to manage and chase payments, all the work can be done by the factoring company, and the cost is usually included in the commission that they take.
Competitive Pricing
Generally the more competition there is in a market the lower the prices are for a service. In the case of Invoice factoring this holds true, so rates from factoring companies are usually quite competitive.
The main Con’s
The Factoring company reflects a suppliers business
This is possibly the biggest drawback to factoring, as the attitude and how the factoring company deals with customers will reflect on the supplier as a business. While problems are the exception rather than the rule, it has to be considered that communication on behalf of a company is being made by a third party who really has only one objective... to get paid for the outstanding invoices.
Disputes and Problems
In most cases a factoring company will pursue outstanding debts efficiently and if there is a dispute on an invoice that was not made when the invoice was issued this can cause tensions and problems. Invoice factoring is best for companies that have a high customer satisfaction level and rarely have disputes about invoices.
Customer like to Deal Direct
In some cases customer prefer to deal direct with their supplier on invoicing and the use of a factoring company can weigh against their decision to use that supplier. This is usually a personal preference and can be down to the notion that a factoring company may be ruthless when chasing invoice payments.
Reduced Profit Margins
While savings can be made from an administration point of view by outsourcing the sales ledger function, companies must consider the fees charged by the factoring companies as a reduction in profit margins.
Reduced Chances of Borrowing
Companies that want to raise additional capital can, in some cases, use outstanding book values (outstanding invoices owed) as collateral for that borrowing. If a company is using an invoice factoring company this security is not available making it harder to raise finance from other sources.
Factoring Influence
Depending on the agreement and the factoring company, there may be an impact on how a company is asked to run their business. Factoring companies will almost certainly want to run credit checks and vet customers and they may well ask to make changes in historical trading terms.
Once in Harder to Leave
Once a company has gone down the route of factoring it can sometimes be difficult to exit from the agreement. This is not necessarily down to the contractual agreement, more so the requirement to find the extra capital needed to pay the outstanding balance owed to the factoring company.
|