The first potential disadvantage is
the cost. Before you make your decision on whether to go down the
invoice financing route, you do need to do your sums to ensure that
it will be truly cost effective. You also need to consider the size
of the annual minimum fee, the length of the commitment period,
and even the small print on the agreement. Some factoring companies
set minimum periods of twelve months plus a notice period of three
to six months. Care should be taken when comparing contract lengths
and notice periods as these can vary dramatically, and will have
an impact on when you can exit the facility.
Some small businesses worry that using a factor might lead to a
loss of contact with their customers. In this case, you need to
choose a factor with a flexible approach to customer handling, which
will allow you to set the terms on which they deal with each individual
customer.
Another aspect of using invoice financing which worries some people
is the possibility that their main bank might restrict other borrowing.
This is rarely a problem these days, as invoice financing tends
to provide more flexible funding than overdraft and is becoming
such a normal way of doing business. If the problem does arise,
your bank will be happier if you use their subsidiary factor rather
than an independent, but this does not mean that you should allow
yourself to be pressurised into this if you can get a better deal
elsewhere.
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