I have one bad paying customer who is also an important one. He is happy if I use invoice factoring.
Are there any drawbacks?
I understand I will lose around 8% of sales value.
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In my experience
... any supplier who starts invoice factoring will go bust in a year or two. It is a kiss of death from a customer's point of view.
That's my experience too
... any supplier who starts invoice factoring will go bust in a year or two. It is a kiss of death from a customer's point of view.
Invoice factoring is like a black hole - it just keeps sucking capital from the business in until it is crushed. Like Euan says, life expectancy is generally 1 to 2 years.
Of course the customer is happy for you to use invoice factoring. It means they can continue to pay you late, and you have to absorb the cost!
If they valued the work you do for them, they regularly pay to your credit terms.
Pros
Boost to cashflow
Not having to 'pester' customers for payment
You will be protected from bad debts if you opt for non-recourse factoring
Cons
The cost
May reduce other borrowing availability
Factoring company dealing with your customers
May need to restructure your finances should you wish to end the arrangement
Like most things...
it has pros and cons.
As you asked specifically about drawbacks two that come to mind are:
1) It can be very difficult to get out of once you are in
2) Dependent on the agreement your "bad payer" may become a disapproved debt i.e. you are still going to have to finance him anyway if he doesn't pay within a certain time. (Non-recourse is much more expensive)
Also, it's worth noting that mrme89 listed (a good list btw) pros and cons of factoring, not invoice financing. The difference being that your customer is not dealing with the factoring company and you still have to manage your own credit control with invoice finance. As you said invoice factoring I'm not sure exactly of your agreement.
It can work well, if you have a high volume of customers who pay badly then it is often cheaper to factor than to employ a credit controller, and some prefer the anonymity that factoring provides because it's not 'you' chasing.
But I wouldn't consider introducing factoring for just one bad customer.
Could they consider a monthly/weekly payment plan?
Never been a fan
I have never been a fan of factoring/invoice discounting. It is very difficult to get out of and is quite costly. In this case the main downfall I see is that the factoring company normally won't finance debts over a certain age and I have seen this as low as 120 days. If your bad payer is that bad a payer then you might even find that invoice factoring won't work.
and mine.......
My only bad debts have been from ltd companies who factored their invoices and went bust :-(
My dealings....
I have dealt with a few clients that have used factoring/invoice discounting. One was a recruitment company and needed the cashflow, this company is still (as far as I know) making a very healthy profit several years down the line. Another was an engraver who clearly didn't need to be in a factored situation (he just needed better credit control), this was an unmitigated disaster.
Just thought I would add a little balance!