There are a few advantages and disadvantages of factoring.
The first advantage is the immediate cash inflow. This means that the cash collection cycle is going to be a lot shorter. This is because it provides the swift realization of the cash by selling all of the receivables to the factor. When the liquid cash is available, then it can be a deciding factor based on grabbing an opportunity or having to lose it. The boost from the cash that is provided by the factoring is always available for the capital expenditures, which helps to secure a new order.
The second advantage is that there is going to be a lot more attention towards the operations and the growth of the business. This is because the business managers are going to be selling off all of their invoices. Therefore, they are going to be free of stress when they are collecting tasks from the customers. The resources that are employed in the receivable department can be directed towards all of the operations of the business. This is also going to be true of the growth in the future of the business and the planning of the company’s finances.
The third advantage is the evasion of the bad debts. There are two types of factoring. The first type is with recourse. The second type is without recourse. If the company does not use the without recourse when they have bad debts, the loss is borne by the factor. This means that the seller is not going to be under any type of obligation to the factor once the receivables have been sold off.
The fourth advantage is the speedy arrangement of the finances. This is because the factors will be able to provide more funds more quickly than the bank is going to be able to do. The application is also a lot quicker because there is a lot less documents that the person is going to need to sign.
The first disadvantage is the reduction of profit. The factor is going to deduct a certain discount from the value of the accounts receivable as fees for all of the services that they offer you There are also going to be some cases where the factor will charge some interest when there is an advance made. This means that the profit will be reduced greatly.
The second disadvantage is the reliability to credit from the customer. When the factor assesses and evaluates the credit of the customer, then it can be a critical factor. This is something that is outside of the control of the seller. This means that the factor could refuse to extend the advances that are due to poor credit ratings.
The third advantage is the exhausting of the collateral security. The factor can exhaust the bills receivables of an entity because the entity is not going to be entitled to receive any payments from them. Therefore, the seller does not have any holding control of the book debts. This means that they can be used as collateral security when getting other types of financing.
The fourth advantage is the presence of contingent liability. The liability of the seller is not going to be waived when the company is using the recourse. Therefore, the party is not able to pay their debts to the factor, the factor is legally required to recover it from the seller. This also means that the seller is going to be liable to the factor for paying all of the debts of the company.