Factoring can be more expensive than other forms of short term finance, especially where there are hidden charges. Be sure that you know the TOTAL cost, including admin fees, transfer charges and any penalties, before you choose a provider.
Factoring reduces your profit margin on each invoice you sell. It can damage your relationship with your customers – they no longer deal exclusively with you, and the factor may use aggressive collection methods.
It can also indicate to your customers that you have cash flow problems, potentially making them wary about dealing with you.
Some providers will seek to lock you into long-term contracts where you are required to sell them a minimum volume of invoices, or all invoices for certain customers. This can be detrimental to your business, especially if there are heavy penalties for breaking the contract.
The availability and cost of factoring will depend on your customers’ credit ratings rather than your own. Some lenders may seek to restrict you from doing business with certain customers.
With recourse financing, you will have to buy back any invoices where the factor has been unable to collect payment. If you decide to end your arrangement with the factor, you’ll have to buy back any unpaid invoices, which could have a big impact on your cash flow.