Factoring and Invoice Discounting

4. The Disadvantages

Unless carefully implemented, factoring can have a negative impact on the way your business operates.

4.1 The factor usually takes over the maintenance of your sales ledger.

• Your customers may prefer to deal with you rather than a factor. However, if the factor's techniques are clearly agreed beforehand, there will usually be no problem.

4.2 Factoring may impose constraints on the way you do business.

• For non-recourse factoring, most factors will want to pre-approve your customers, which may cause delays.The factor will apply credit limits to individual customers (though these should be no lower than prudent credit control would suggest).

4.3 You may only want the finance arrangements, but unless your scale of operations is big enough to justify invoice discounting, you may feel you are paying for collection services you do not need.

4.4 Ending a factoring arrangement can be difficult.

• Your only exit route is to repurchase your sales ledger or to switch factors.
• On a practical level, you need to be able to provide an alternative form of financing to make up for the sudden shortfall in your working capital.