Disadvantages of Factoring
Although factoring is a great solution, it is not perfect. No solution is. Here are some disadvantages of factoring…
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Although factoring is a great solution, it is not perfect. No solution is. Here are some disadvantages of factoring:
- It costs more than a line of credit
Factoring usually costs more than bank-offered financial solutions. Typical rates can range from 1% per 30 days to 4% per 30 days. Note that the rate and the advance are used in conjunction to determine your real rate. Learn more about the “true cost of factoring”.
- It solves only one problem
Although loans and lines of credit can often be used for a number of things, factoring solves only one problem: cash flow shortfalls due to slow-paying clients. Therefore, it can be one-dimensional and should be used only to solve that problem.
- It is labor intensive
Factoring can be labor intensive for the client. Every time you want an advance, you must submit a schedule of accounts, along with a copy of your invoices and any backup documentation. This task can often be done by email or through the Internet.
- Finance companies contact your customers
The factoring company contacts your clients at the start of the relationship and sends them a standard letter informing them that they are managing your invoices. The factoring company may also contact your clients if payments are late or if any major issues arise.
- Finance companies don’t handle bad debt
While factoring companies are good at limiting bad debt, there is still a chance that some invoices will not get paid. Factoring companies are not collection agencies and do not behave like collection agencies. This point is very important. Bad debt will go back to your company so you can assign it to an attorney or a collections company.
Source: Commercial Capital LLC is a provider of accounts receivable factoring, purchase order financing, and supplier financing to small and mid-size businesses. You can connect at www.comcapfactoring.com or by phone at 877-300 3258.