Factoring financing has been gaining traction as a way to finance a growing business. It’s a solution that allows you to finance slow-paying invoices from creditworthy commercial clients. Accounts receivable factoring improves your cash flow and provides the financial resources to cover business expenses and grow. If you are not familiar with this type of financing, you can learn about it in detail by reading “What is Factoring?” and “How Does Factoring Work?”
Like any business financing solution, factoring has both advantages and disadvantages. This article explains these advantages and disadvantages so that you can make an informed decision as to whether factoring is the right solution for your company.
Advantages of factoring
Factoring has several advantages over other business financing solutions. Here is a summary of the most important advantages.
1. Improved cash flow
The most important advantage of factoring your invoices is improving your cash flow. The improved cash flow puts you in a better position to cover company expenses and handle growth.
2. Extend payment terms with confidence
You can extend 30- to 60-day payment terms to customers confidently. You always have the option to finance the invoice to get funded quickly. This feature is important because it allows you to add new clients while minimizing cash flow concerns.
3. Easy qualification requirements
Unlike most common business financing solutions, qualifying for factoring is relatively easy. The most important qualification requirements include having:
- Creditworthy commercial invoices
- Net-30- to net-60-day invoices
- Accounts receivable that are free of liens
4. Available to small businesses
Factoring is one of the few solutions available to small businesses, including single-person companies. It can be used as a stepping stone to grow the company and eventually move to other financing options.
5. Quick funding
The factoring line can be deployed quickly. Most lines are deployed in a week or so but can be deployed faster if the business owner is well prepared.
6. Line flexibility
Since the line is based on your invoices (their dollar amount and quality), it can grow and adapt to increasing revenues. This important advantage provides a financial platform to support growth.
7. Simpler application
Invoice financing has a simpler application and due diligence process than most other solutions. This simplicity makes factoring an ideal option for small and midsize companies that don’t want to undergo a lengthy underwriting process.
Disadvantages of factoring
However, invoice financing is not perfect for every company. Factoring has some disadvantages that you should be aware of so that you can make an informed decision. Some disadvantages include:
1. Cost
The cost of factoring financing is much higher than other types of funding. The solution works best in transactions that have a minimum profit margin of 20% and invoices that pay in 60 days or less.
2. Solves a very specific problem
Factoring is designed specifically to address the cash flow problems created by slow-paying customers. If you have other problems, or if you need capital to buy equipment, factoring offers little (if any) help.
3. Your customers will know
Your customers will know that you are using this type of financing. Factoring companies send your customers a Notice of Assignment (NOA) advising them of your factoring relationship. The NOA is a standard industry document, and every factoring company uses it.
4. Your invoices will be verified
Most factoring companies verify your invoices with your customers to ensure that they are accurate and that your customers are satisfied with the products/services.
Conclusion
Invoice factoring can help companies whose financial problems stem from slow-paying clients. It’s an ideal option for small and midsized businesses with profit margins of 20% or more. However, if you are unsure if factoring can help you, consider speaking to an accountant or similar advisor.
Get a factoring quote
Are you interested in a factoring quote? We are a leading provider of factoring in Canada and can offer high advances at low rates. For more information, call us toll-free at (877) 300 3258.