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Debt Factoring Advantages and Disadvantages

Our latest guide explores debt factoring advantages and disadvantages for those considering its suitability as a business finance option.

For those unaware of what debt factoring is, it involves businesses passing their unpaid debt in the form of invoices – once raised to customers – onto a chosen funder, who will then provide a high percentage of the invoices’ value as an advance.

It’s a proven and popular product among SMEs and if you want to see how it can fit with your business objectives read on below. Note, we’ve already published a detailed article of what debt factoring entails here.

Comparing debt factoring advantages and disadvantages

Advantages

1. Rapid access to vital funding – Many traditional business finance products require substantial time to come to an arrangement: extensive paperwork, long-winded stock valuations and other mitigating factors which could deter the idea of accessing additional funding. With debt factoring however, a facility can be approved in as little as a working week provided that your business has a stable £50,000+ annual turnover and satisfies any checks which the funder deems necessary to assess its financial stability. If your firm needs urgent financial support for daily operations or fulfilling peak season demand, then this service could thus prove invaluable.

2. Speed up business growth – Debt factoring can assist in increasing your monthly cashflow so your business can grasp new opportunities in the wake of the post-Brexit business market. For a minor cost, businesses across all of the major industries could utilise this to implement strategies to expand their services and client base.

3. Save time and minimise debt chasing admin – The process of chasing impending or overdue payments from customers could be taken care of via an invoice factoring facility – debt collection is handled by the funder so time and effort can be prioritised to winning new business, building client portfolios or maximising operational efficiencies. Vital for growing firms who require extra time and care with key business relationships.

Disadvantages

1. Different industries, different solutions – Debt factoring, in much the same vein as some other cashflow support facilities, isn’t ideally catered to every UK business. For example, if your firm’s sales ledger relies on a small number of core customers of which are less reliant on 30-90 day credit terms, then your chances of securing a debt factoring arrangement are slimmer. Additionally the size of your current customer base can affect the funding available through debt factoring due to concentration limits imposed by certain arrangements, meaning that businesses with smaller client rosters may want to consider alternative facilities which don’t rely on this criterion such as an unsecured business loan.

2. Creditworthiness criteria –Your desired funder(s) will prefer some assurances that the arrangement is low in risk and the client’s customers tend to make their payments accordingly. As such, a different finance solution – e.g. asset finance, a service focused moreso on your current property / equipment holdings – may prove more desirable for your business if the reliability of your customer base is still being established. We always therefore advise that companies curious as to what factoring opportunities are available to them first seek independent guidance to ascertain whether their customer base’s credit ratings will likely qualify them for the service.

3. Preserving customer relationships – More relationship management consideration is needed to account for debt factoring in the form of invoice factoring. The more that invoice finance has grown in prominence in recent years, the less of an issue that arrangements involving outsourced debt chasing has become for most industry players, but for any businesses relying on only a handful of clients, ensuring that these precious relationships aren’t jeopardised by the introduction of a funder into the fray cannot be overstated. Firms concerned about these matters might consequently need to consider a confidential invoice finance arrangement, wherein the company and their funder will collaborate without ever needing to notify the customer base of their financial agreement – thereby achieving the best of both worlds.

Find out more

Before pursuing any funding solution to support your company’s working capital and growth, it’s vital to consider the implications that such arrangements can hold for the future.

We hope that this guide has offered you an insightful introduction into debt factoring advantages and disadvantages, enhancing your awareness of whether it represents the most suitable arrangement for your business. If you’re considering a variety of invoice finance options at the moment, be sure to read our invoice discounting advantages and disadvantages guide for further information on this alternative facility, or simply get in touch today and one of our team will gladly answer any outstanding queries at no charge.

Apply now and one of our consultants will help to find you the best invoice finance facility for your business, free of charge.

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