• AskGuru

What are the advantages and disadvantages of invoice factoring?

Updated: Feb 12

Invoice factoring allows you to borrow money against the value of your unpaid invoices. It’s a type of asset-based business finance that’s prized by small- to medium-sized businesses that need to maintain good cash flow.

At first glance, invoice factoring may look like an ideal solution. Particularly if you:

  • Struggle to maintain positive cash flow

  • Need ready cash to finance growth

  • Frequently find yourself chasing unpaid invoices

  • Don’t have the resources to manage your own credit control

After all, an invoice factoring facility allows you to outsource all aspects of debt recovery and (more-importantly) provides you with a cash advance within 24-72 hours of issuing an invoice.

Invoice factoring does have some disadvantages though. It can affect your company’s image, it does take away some of your control, and you will often have to take responsibility for bad debt too. These disadvantages may not outweigh the advantages associated with being able to exchange your invoices for ready cash, but they are worth considering. Particularly if you’re working with a small pool of clients, or want to retain control over the credit collection process.

To help you work out whether factoring is the right facility for your business, this article breaks down the main advantages and disadvantages associated with invoice factoring.

As follows:

What are the advantages of invoice factoring?

Using an invoice factoring facility, you will:

  • Benefit from improved cash flow

  • Enjoy better working capital, which means more money for growth projects, staff training or stock purchases

  • Be able to move away from more restrictive forms of finance, like small business loans or overdrafts

  • Benefit from your chosen finance provider’s in-house credit control processes

  • Be able to focus on running your business, instead of chasing clients for payment

What are the disadvantages of invoice factoring?

There are some disadvantages too though. Your clients will be informed that you’re using an invoice factoring service, and your factor will contact them to collect on factored invoices which means that:

  • The image of your company may be affected, particularly if your clients assume that you are not established enough to oversee your own credit control

  • You won’t be able to maintain your standard approach to client communication

  • You may find that some of your clients prefer working with you directly, and dislike the fact that they have to interact with your finance provider.

It is also important to remember that most invoice factoring agreements are recourse arrangements, which means that you will be responsible for any unrecoverable invoices. If you’d like to learn more about the advantages and disadvantages of invoice factoring, you can read our dedicated page here.

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