An increasingly popular method of regulating a business’ cash flow is to sign up to invoice factoring or financing and release the book debts quicker than the customers may pay you. It is therefore often appealing to start-ups or growing businesses. There are pros and cons of undertaking such a step as follows:-
- You may typically receive up to 80-90% of the value of your outstanding invoices very soon after raising the bill, often within 24 hours.
- The factoring company chases up the debt to take the task of debt collection out of your hands (factoring only).
- You may be able to take out bad debt protection to cover a possible non-payment by a customer (non-recourse).
- It will provide the immediate cash to assist you in growing your business.
- You are not taking out a business loan but borrowing in line with work and bills already completed.
- The security is against the book debts, not against the physical property or machinery of the business.
- Financing costs can be in the form of interest, at 1.5%-3% over base of the value of the amount receivable calculated daily and applied monthly; fees, in the form of an administration charge and; bad debt protection (non-recourse).
- Customers may be wary of being chased by the factoring company. Note, invoice financing may be preferable as you retain responsibility for your credit control function.
- Credit limits may be set for your customers by the factoring company.
- Exiting the agreement can be difficult.
- Recourse factoring can mean you have to repay any debts that default.