While invoice factoring is a great product that offers flexible financing to companies that have cash flow problems – it is not a perfect product and like any products, it has some disadvantages. This short article will help you understand some of the disadvantages of invoice factoring and can be used as a tool in your decision-making to determine if factoring is the right solution for you and your company. Here is the list:
- It’s costly relative to other products. Most receivables factoring companies would agree that in general, using invoice financing is costlier than using other business financing products. Because of this, factoring financing works best for companies that have relatively high gross margins which can absorb the cost of funding.
- It only solves one problem. This solution is designed to solve one specific problem – the cash flow problems that are created by customers who pay their invoices in 30 to 60 days. It is good at solving that problem, but may be of little help if you need funding for anything else such as buying a large piece of equipment/machinery.
- Your customers will know you are using factoring. Most factoring companies will contact your customers and require that they receive and acknowledge a factoring notice of assignment. This document advises your customers of the financing relationship and requests that payments be sent directly to the factoring company. While most companies will comply with this request, you should know that not everybody does. And obviously, by sending the notice of assignment you will be disclosing that you’re using a factoring solution.
- Your invoices will be verified regularly. Factoring companies need to ensure that the invoices that they are buying are accurate and valid. Because of this,many receivables financing companies will conduct invoice verifications with your customers. As part of this process, your customer usually needs to verify that the invoice is correct and that goods/services have been received. You can usually use this process as a tool to make sure that your customers are happy with your services – however – your customers will need to get accustomed to speaking with a factoring agent on a somewhat regular basis.
One thing you should know is that there is no “perfect” business financing product. Every product has its pros and its cons which should be evaluated as you’re making a decision on which product to get. While the list that we have provided is by no means all-inclusive, it will give you a brief idea of the most common disadvantages of factoring your invoices.