Like most forms of financing, factoring has advantages and disadvantages.
The advantages include:
- Better liquidity
- Lower risk of default
- Stronger credit rating
- Reduced accounting burden
- Optimized customer relations
In addition to the apparent financial aspects, the last point is interesting: Companies that sell receivables can, for example, grant their customers longer payment terms without risking liquidity bottlenecks.
On the other hand, this can turn into a disadvantage. With factoring, customers come into direct contact with the factor - some interpret this as mistrust on the company’s part, which can cause lasting damage to the customer relationship.
In addition, only existing open invoices can be sold. Future invoices that only arise in the following months cannot be considered.
Costs are another reason why many entrepreneurs look for factoring alternatives. Because metrics such as annual sales and average invoice volume are contributing factors, fees are very opaque. They are made up of items such as processing and verification fees and reinsurance costs. In addition, there is a factoring fee and often interest.