Pros and Cons of factoring

13/08/2008

There are many obvious advantages to factoring, especially in the current economic climate when control of cash must take priority. However, it's important to weigh up the pros and cons in order to decide whether factoring is the right solution for your organisation.

The pros:

1) Improved cashflow, growing in line with your sales and not restricted by any upper limit.

2) No need to provide additional security, as would be required for a bank loan.

3) Improvement in debt turns. Using a factoring company usually has the effect of encouraging debtors to pay promptly.

The cons:

1) Factors don't accept all types of debtors. A factoring company will want to make sure their clients have procedures in place to vet potential debtors.

2) Factoring is not the cheapest method of finance. That said, a smart business will offset the cost by using the cash to negotiate early settlement discounts with their suppliers.

3) Sometimes there can be a minimum term for the contract, typically between one and three years. Organisations need to be certain of the course their business is going to take, before committing to such a contract.