Disadvantages Of FactoringJust as factoring has its advantages, there are also disadvantages of factoring. Several distinct disadvantages of factoring include (…but are not limited to…): - Enlisting the aid of a factor can be the difference between a company’s survival and bankruptcy. Carefully consider all options. Remember: The factoring industry is not as regulated as banking. So, spend the time necessary to investigate the companies you are working with. Inspect contracts and negotiate discount rates. In the end, using a factor can provide the time you may need to eventually qualify for a regular credit line from your bank. - Depending upon a factoring client’s current business situation, factoring can be very expensive. Remember, a factor can charge 1.5% to 5% of the total account balance each month. Depending upon circumstances, this could be very expensive for the factoring client. For example, on it an account totaling $100,000 offer a 30 day terms where the factor is charging a 5% fee, the factor will receive $5000 per month until the factor gets your customer business to pay off its invoice. So, if the debtor company does not pay off its invoice for three months, the factor will charge its factoring client 5% for each of the three months ($100,000 x 5% x 3 months = $15,000). So, on this $100,000 account, if the factoring client company received an up-front advance of $85,000 from the factor, that company would receive no additional monies ($100,000 - $85,000 advance -$15,000 fee = $0.00 to the factoring client business in the end). - Should a company chose to use “spot” factoring (one-time-only factoring), the cost may be prohibitively expensive. Most factors prefer to work with business clients on a continuous basis for 1 to 2 years at a time. Doing this timeframe, the factor and the factoring client become familiar with one another. The factor can offer the full range of services to the factoring client, and in doing so, the factoring client can build a trusting relationship with the factor. The end result is a steady flow of money between the factor and the factoring client. With spot factoring there is no opportunity for this kind of relationship building. A one-time spot factoring event does not provide the factor with enough time to get to know the factoring client. The factor must make all of his profits at one time. Therefore, the fees the factor will charge will inevitably be much higher than he would have charged had there been an ongoing, continuous relationship. - The bottom line is that the use of a factor is not free. Using one will eat into your profits. A factor will charge anywhere between 1.5% - 5% on the entire account per month. This means that on a $100,000 account, a client business will pay between $1,500 to $5000 per month for the factor’s services. Should the debtor business not pay the account for three months, the factor’s fee will total $4,500 to $15,000. That is money directly from business’ bottom line. - If your business is operating on a low profit margin, factoring the business’ accounts receivable may not be a good thing to do. All factoring companies charge a factoring fee. If your company’s profit margin is too low, it may be too slim to engage a factor.
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