Advantages and disadvantages of debt factoring?

Answer 1

Advantages

1. First, debt factoring provides your business with immediate cash flow for the accounts receivable from the customers which are carried in the accounts books. This facilitates smooth growth.

2. Improved cash flow for the business without being derailed by the debtors.

3. The debt factoring enables the business to reduce the time frame for its cash cycle thus being able to purchase goods and sell the same to make profits.

4. It helps to protect the business from bad debts especially when using non-recourse factoring.

5. Inexpensive debt collections through the use of the factor who handles the transactions on your behalf.

Disadvantages

Just like any other venture, debt factoring has its own disadvantages. They include:

1. One of the disadvantages of factoring is that it can be an expensive method of obtaining financing. Selling account receivables at a discount could impact on the business capital.

2. External influence on your business from the factor. This will however depend with the contract or agreement you enter into and whether it allows the factor to change business practices.

3. The handling of customers by the factor especially those who delay payments could affect your relations with them negatively. This could in return affect the progress of your business due to their perception about it.

4. In case of recourse factoring, your business could suffer from bad debt liability since these debts becomes your responsibility.