Invoice Factoring Pros and Cons

Invoice Factoring Pros and Cons

Pros

  • Invoice Factoring Pros and ConsIncreased Cash Flow- This is the main reason businesses use invoice factoring, to meet short-term cash flow needs. Factoring provides quick small business funding.
  • Not a Loan. Accounts receivable factoring is not a loan, so factoring invoices will not increase your company’s debt. This is important because have covenants and factoring could be a way
  • Flexibility- Small businesses can begin factoring invoices all at once, a few at a time, or can utilize spot factoring, which means factoring a single invoice.
  • Fuel Growth- Invoice factoring is great for faster-growing companies. Replacing payment delays for immediate funding can fuel growth initiatives over time. These could include having the funds to hire a new employee, help with an advertising campaign or capitalize on an opportunity.
  • Factoring Costs May be Tax Deductible-As a business expense, certain components of invoice factoring costs may be deductible. Check with your accountant or tax advisor to see if these costs are deductible for your business.
  • Better Utilize Resources- By outsourcing the collection obligations, your business can get back to operating the business.

Cons

  • Bad Reputation-There is still a negative connotation associated with invoice financing.  Some businesses worry about what their customers will think when they receive a notice of transfer. The truth is, many customers are probably using factors themselves.
  • Higher Costs- Factoring costs do tend to be higher than more traditional small business funding options such as working capital loans or a business line of credit. But try and remember that comparing annual interest rate percentages is like comparing apples to oranges since a business that is factoring receivables is essentially receiving a collections department for free.