 Nevertheless, invoice factoring seems to have a lot of benefits but there are the downsides of it. So, before you decide to start factoring your invoices, you should carefully consider all pitfalls.
Factoring can be addictive
Once a company starts invoice factoring, it often finds it difficult to stop. Instant cash is addictive to small business. Because once you start factoring your receivables you may find it hard to live without it. You can transform your business to a COD business in about 30 to 60 days using invoice factoring. And the main question in this situation is why would a company want to stop factoring after it starts? Exactly as there are some good reasons to start factoring, there are some good reasons to stop factoring.
Factoring can be expensive
The costs are comparatively low as factoring is quite a competitive industry. Costs are depending on whether the factor has recourse in the event that your customer is loath or unable to pay and they are generally between 1-3% of the invoice if the customer pays within 30 days. It could prove to be quite a bit more expensive than other forms of financing over the course of a year. Debt instruments such as a line of credit may result in lower total interest cost than you are paying in factoring discounts if your company growth to the point that conventional financing becomes an option.
Factoring may delay conventional forms of financing
Be aware, in case your goal is to obtain conventional bank financing, that the bank is just as interested in your accounts receivable as the factoring company. The bank places great weight on your company's accounts receivable when making the final lending decision. Bank cannot consider your accounts, if they have been factored, as part of its lending decision because you no longer own them. Because of banks are reluctant to subordinate its position in one of the most liquid assets your company owns this all could result in the bank rejecting your loan application.
Factoring can be meddlesome
The factoring company will purchase your accounts receivable based on the financial strength of your customers. It will require your customers to provide it with financial information. Your customers often resist this. For mitigating some risks that it sees in the composition of your accounts receivable the factoring company may exert influence on the way you do business.
Factoring can be confusing
Your customers may be confused with invoice factoring. The resolution of disputes, questions, and the application of credits may confuse both you and your customers. Moreover, the dispute must also be resolved with the factoring company. But it is further complicated by the fact that you may have already been paid for a disputed invoice.
Factoring can be stigmatizing
Some of your customers may not like the obstacle of sending payments to a third party. Most factoring companies vigorously deny it. But your customers may view your utilization of a factoring company as a sign of financial weakness, and that may have a negative impact on their purchasing decisions. Your customers may not be as willing to include your company when they are demanding bids and quotes because of a perceived worsening in your company's financial stability.
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