Pros and Cons of Factoring Companies

Companies that offer factoring services have a long standing history that dates back to the time of colonization. Today,factoring North America companies have maintained strong ties with the textile and apparel industries.

But what exactly is factoring? Factoring simply means immediate conversion of invoices to cash to cover operating costs without incurring debt. Thus, you have an opportunity to sell your invoices to companies offering factoring service at a small discount and get instant cash for your business.

The major advantage of factoring over bank loans is that with factoring the quality of your customers is the main focus. In addition, it is faster compared to banks as you can receive an approval within 24 hours. What’s more? You do not have a debt to repay even with the unlimited funding potential.

Pros and Cons of Factoring

Like any other business, factoring companies present unique advantages and disadvantages. Therefore, you will do well to take a close scrutiny before going for factoring services.

Advantages

The three major advantages of factoring are as follows:

  • The application process is simple – This is advantage in the sense that the paper work is not too much that you have to spend so much time getting things together before you can file an application. This means you can apply on the go.
  • Faster funding – Unlike major lending institutions especially banks, you are guaranteed of faster funding with factoring. This means your business will not have to stall as you wait for fund to make the purchases that you need.
  • Higher approval rates – Factoring services are known to offer higher approval rates. In fact, it is because of this that businesses that are not well established are able to receive funding and grow to become large enterprises. Businesses are also able to meet payroll, get supplier discounts for bulk purchases and invest in equipment that improves productivity.
  • Improved cash flow –When you work with a factor, you can be sure that your cash flow will improve. This is largely because you will not have money tied up in accounts receivable that are slow paying.

Disadvantages of Factoring

  • One of the drawbacks of factoring is evident when you are solving for cost where bank lines of credit are less costly than factoring. This especially true when the bank is capable of obtaining the amount they are seeking from a bank within a reasonable time frame.
  • The other disadvantage of working with traditional factoring companies is that your customers have to be notified about the financed invoices and this may sometimes make small business uneasy effectively interfering with customer relations. Keep in mind that some factors may take over your account receivables therefore if you are interested in factoring only these then ensure you go for a company that is able to respond even on a non-notification basis.

Overall, factoring services are a great way of bridging cash flow hiccups that may sometimes be experienced by companies and financial institutions like banks are not willing to fund. The good thing about it is that you do not get into debt as you are simply advanced money to keep your operations going.