Debt factoring is the procedure that will include selling goods at discounted price. The companies would purchase your goods at the discounted market price, when compared to the market rate of goods.
The factor will purchase the invoice of your business at low price and then your factor would take the responsibility of collecting your dues from your customers. There are many advantages and disadvantages of debt factoring. The following are some advantages of debt factoring:
1. You can get rapid finance:
It will not take long time for businessmen to get required cash for your firm. This will be recorded in your account books. This way you can expand your business as well.
2. Increases Flow of Cash:
It is true that Debt factoring can increase flow of your cash. This is one of main advantage of this business. You are not supposed to wait to get cash for your customers.
3. Improves Your Cash Cycle:
Businessmen have some difficulty in getting cash from their goods but if they sell their goods to factor then they will not face this problem. They will be able to turn their goods into cash within limited span of time.
4. Gives Protection From Bad Credits:
If you use non recourse factoring then your factor will take the responsibility of bad debts in your business. If the businessman is facing bad debts then this will have a negative effect on credit history of the businessmen. However, once the goods are sold to the factor then there are chances that you will be protected from bad credit in the commercial world.
5. Free From Collecting Remaining Dues:
If you sell your goods to factor then you are free from the burden of collecting your dues from the customers. Factors will look after your account books like observe the record of the goods that are received and will also maintain the record of your customer who has released the payment.
These are some advantages of debt factoring.
However, it is true that is every coin has two sides in the way debt factoring also has some disadvantages. The following are some disadvantages of debt factoring:
1. Effect on the Capital:
Factor would purchase your receivable goods at discounted price. you would have some difficulty in finding factoring company as these companies are very expensive. This way you should get ready to spend a lot of capital in finding the company for your deal.
2. Factor will overrule Your Business:
As the factors have many contacts so, there is a chance that your business will be over ruled by your factor. Factor will restrict you to have a word with some of customers. Factor will have direct word with your customer without your inference. This in turn will have an effect on your sale procedure.
3. Harmful For Customer Relationship:
As your factor will be in direct contact with your customer there are chances that your factor will create a positive impression on your customers. On the other hand, some factors will create a negative picture about you in front of your customer.