Advantages and Disadvantages of Factoring

Factoring can be defined as an arrangement between the financial institution and a business concern in which financial institution buys up the book debts of a company on a regular basis and pays the cash to the company against receivables and then collects the amounts from the debtors of the company.

Here are some of the advantages of factoring for the company –

1. It reduces the administrative cost of the company.

2. It improves the liquidity because bank gives the cash and then it is the bank which collects the money and hence company can manage its working capital in a more efficient manner.

3. It provides insurance against the bad debts from debtors of the company.

4. It eliminates the trade or cash discounts to be given to customers because banks deal with the customers for taking cash from them and not company.

However there are some of the disadvantages also of using factoring –

1. Factoring may not be of much use where companies have nationwide network of branches, it is more suitable for small companies.

2. Image of the company may suffer because others may view factoring as a sign of management of company being not efficient and effective.

Hence before taking factoring companies must analyze the above pros and cons and should take decision accordingly.