Invoice Factoring Pros and Cons

Invoice Factoring Pros and Cons

Pros

• Increased Cash Flow- This is the main reason businesses use invoice factoring, to meet short-term cash flow needs. Factoring provides enhanced net working capital.

• Not a Loan. Accounts receivable factoring is not a loan, so factoring invoices will not increase your company’s debt. This is important distinction from online small business loans, which come with covenants and often require personal guarantees.

• 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- One of the attractions with working capital business loans is the potential for interest deduction (‘interest expense’). Still, certain factoring costs may be deductible if classified as a business expense. 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.

• Better Relationship with Customers- Instead of operating like a debt collector, let the invoice factoring companies can do the dirty work for you.
• With non recourse factoring, you transfer the customers credit risk to a factoring company.

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 small 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.