Disadvantage 1. Costs are too high
One of the most heard disadvantages of factoring are the high costs. In the past, this was certainly a legitimate objection. Because the factoring company had to do a lot of work manually, the cost of management, known as the factor fee, was particularly high. This work included entering invoices, updating payments and sending reminders and dunning letters. All this work is now automated. For example, communication with customers about invoices and payments is largely done by e-mail and often by SMS and WhatsApp. This ensures low costs and takes a lot of work off the entrepreneur's hands. As a result, factoring (or revenue commission) is hugely reduced in price. Whereas two decades ago it was sometimes over 1% of turnover, today it is around 0.3% on average and regularly a lot less. Also, thanks to better funding from factoring companies, interest costs have been reduced to such an extent that, especially for somewhat larger loans, they are comparable to the interest rates charged by large banks. These cost reductions make factoring debtors a more attractive option for many companies. Want to read more about the different costs involved in a factoring services hear?
Disadvantage 2. Providers reject risk in factoring
Factor companies only finance receivables related to completed performance and debtors with insurance limits. This means that if the credit insurer does not issue a limit on a debtor, it is not eligible for financing. This is a disadvantage, but on the other hand, it is also an important signal. If an insurer does not issue a limit, it is a signal that the factoring risk on that particular buyer is high. This is a good argument to start discussions with the buyer about (partial) prepayment or a shorter payment period. As a result, when factoring, you can reduce accounts receivable losses and improve operating profit in the longer term. Incidentally, under certain conditions it is also possible to conclude a factoring agreement without insuring the debtors.
Disadvantage 3. Interference with debtor management
After entering into a factoring agreement, the company takes over the company's debtor management. They start sending reminders and dunning letters after the due date and calling the debtors asking them to pay the overdue invoices. Some entrepreneurs see this as detrimental interference from the lender. However, remember that the principle of 'strange eyes compel' applies here. By outsourcing the credit management to the factoring company, the average payment period is reduced and, as a result, the annual interest costs fall at the same time. Incidentally, here too, agreements can be made about continuing to conduct (part of) the credit management yourself. With larger companies, it is even possible that the factoring company does not get involved in this at all and that the buyers do not even know they are working with a factoring company.
Disadvantage 4. Factoring as a business loan has a bad image
We often hear the argument that using factoring as a business credit is only something for bad companies that cannot get 'ordinary' bank credit. Quite apart from the fact that nowadays it is difficult even for financially strong companies to get an overdraft from one of the big banks anyway, this is an outdated statement. We also see more and more large, financially strong companies using factoring. This is because the costs are comparable to those of a normal credit and that by combining it with credit insurance, they can manage the risk much better. On top of that, a factoring credit absorbs seasonal peaks and troughs much better and automatically grows with a company's sales growth. This often makes it a better financing solution even for financially healthy companies.
The benefits of factoring?
Factoring allows you to optimise your working capital and create more security by keeping your cash flow healthy. Want a more comprehensive insight into why factoring could be of interest to you? Then read more about factoring. Do you prefer personal contact? Then feel free to contact with one of our advisers.
