Disadvantages of Debt Factoring
Debt factoring is the process of
selling customer accounts receivable to a specialized finance
company known as a factor. The invoices are purchased at a
discount and then the factor collects directly from the
customers.
Factoring can have several disadvantages for
businesses that should be considered
- Cost - Factoring may be an
expensive way to obtain financing. Accounts receivable are
sold at a discount. This may imply a cost of capital great
than other sources of financing.
- Outside Influence - Depending on
your specific arrangement, a factor may begin to have
influence over your business. They may not allow you to
deal with certain customers or attempt to change your sales
practices.
- Customer Relations - Since your
customers will deal directly with a factor to pay invoices,
an unprofessional factor can negatively impact your
customer's perception of your business.
- Bad Debt Liability - If you are
using
recourse factoring, any bad debts remain your
responsibility.
| 