The Cons of Factoring
It is much easier to discuss the pros of factoring. Finding the cons of factoring is a bit more difficult.
The Cons of Factoring
When a deal works successfully between a buyer, seller, and a factoring company everyone benefits to some degree. It is possible that all the parties involved might have their individual downsides and they may view these as cons of the factoring process itself. However, a closer examination will reveal the fact that the complaints are not really substantial.
The buyer is aware that, in most cases, he is the one bearing the cost of the factoring arrangement. It is not uncommon for suppliers to raise prices passing along the cost to the buyer. One indication of this is the willingness of many suppliers to offer discounts to buyers who pay cash or accept terms calling for a shorter term. This is usually a case of the discount amounting to the cost of the factoring that would be involved in a long term invoice. It is possible that a buyer would consider the fact that he is bearing the cost a con of factoring.
The seller is not going to get the full sale price when he sells the invoice at a discount. The discount is actually a reduction in his total assets. It is possible that the seller would view this discount as a con of factoring, but there is also no gun to his head. The factoring deal provides him with cash that he can use now, rather than an account in his books that can not be used until a later date. This is what the seller needs and he knows that any other method he uses to provide cash flow will also have a cost.
The factoring company is assuming the risk and the hassle of collection. If the deal goes bad, the factoring company is the only one that is actually out of cash. Even in the case of the recourse factoring method, the factoring company is still the one that must take the first action when things do not turn out as they were intended. However, again, all investments have risks. The factoring company "factors" the risk into the discount it offers when purchasing accounts.
It is only when the deal goes bad that the factoring arrangement can be problematic for the involved parties. Each party has a set of responsibilities and must live up to them in order for it to work. If one party is dishonest, or attempts to "con" the other, it will share the fate of any business transaction that goes bad because it is not done in good faith. It may be the only real con of the argument for factoring in business finance. It is a business transaction between three parties, rather than just two. This fact alone increases the amount of trust and the risk. Compared to the benefits of factoring, the cons of factoring are few, indeed