Inter Global Finance

Small business owners in the UK, in light of the current economic downturn, may be experiencing some type of credit card or debt issue.  In all fairness, both big and small business owners are suffering from limited resources but it may be much more difficult for a small businesses to secure cash from banks that are also becoming more strict with their lending practices.  This is where invoice factoring also known as invoice discounting can help businesses.  However, in the interest of fairness and disclosure there are some disadvantages to invoice discounting as well.  Invoice factoring is simply a process that allows businesses to sell their accounts receivable or invoices to a lender at a discount.  For example, if a company is owed 100,000 from customers in unpaid invoices may be able to get 75,000 by going with a factoring company.

Advantages

One of the most obvious benefits to factoring is that you are given a large amount of capital up front so that you may pay off any other debts that your company may have.  As soon as the money has been received and there is capital available you are able to order additional supplies or any other things your company may need in order for your business to run more effectively. Additionally, since you are essentially outsourcing your accounts receivable to another company, you and your employees are free to handle other business matters.  Factors typically check the credit standing of your customers, this is useful information that may help you be able to negotiate more favourable terms with your suppliers if your customers have excellent credit scores. That is vital information to have. As a business owner you may be able to determine which customers are more likely to default thus causing a wider debtor spread.

Disadvantages

Your available cash output may be adversely affected because any disputes or queries will have to be referred on. There are other disadvantages such as your profit margin will have decreased due to factoring and you may not be able to order or fulfil as much on your next supply order.  What some businesses may not be aware of is that some factors will limit funding against poor quality debtors.  Lastly, your customers may not prefer to deal with a factor and a factor that is not a reputable company or has poor business practices may reflect negatively on your company and those customers may not want to do business with you any longer.