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Debt Factoring: Advantages and Disadvantages

Published on 8th July 2019 - Last update on 10th July 2019

Being able to generate a reliable cash flow each month is a prerequisite for any UK business, providing a basis from which to support day-to-day operations and future growth. Yet as your business continues to trade, you may stumble upon situations that could disrupt your cashflow and lead to further complications if left unchallenged. One such scenario can involve customers failing to pay for the goods and services they’ve received on time, leaving your business out of pocket in the meantime. However, rather than accept the hit to your finances, a solution that many business owners use is Debt Factoring - a type of Invoice Finance. Yet before making your mind up, it always pays to have all the facts to hand with the advantages and disadvantages of Debt Factoring.

Debt Factoring - Advantages

Debt Factoring offers many advantages to all manner of business. It is a tool that enables you to release up to 90% of the capital contained within any unpaid business-to-business (B2B) invoice worth in excess of £5,000, regardless of whether it is late being paid or you just need the money sooner than expected. Plus, whatever capital you manage to release isn’t subject to any usage restrictions, enabling you to support any aspect of your business including uneven cashflow, business tax, utility bills, unexpected payment demands, purchases or even growth.

In addition, Debt Factoring can support a wide range of financial situations, so having an adverse credit rating may not always lead to your application being rejected. It’s also worth noting that, depending on the complexity of your request, you could receive an offer in as little as 48 hours with the agreed funds following soon after. Therefore, Debt Factoring is a useful tool that offers you the confidence and support necessary to continue pursuing your goals.

Is your business suffering from a cashflow shortfall? Need access to additional funds and fast? Apply for a Debt Factoring agreement now or click here to learn more about how your business could benefit from Invoice Finance

Debt Factoring - Disadvantages

Although this is a useful product to consider in times of need, Debt Factoring also has its disadvantages which must be acknowledged before applying. For instance, in order to qualify for Debt Factoring, your business must conduct a sufficient amount of trade through the use of business-to-business (B2B) invoices. You must also possess an annual turnover of at least £25,000, maintain up-to-date business ledgers and have the ability to undertake effective credit control procedures. However, Debt Factoring does allow the lender to pursue the debtor (your customer) on your behalf which, on one hand, saves you time, but may harm your business’ reputation from the debtor’s perspective.

It’s also essential that you’re aware that Debt Factoring is a secured form of lending which, instead of physical assets, uses the capital contained within the concerned invoice as collateral. As such, if the debtor fails to repay what they owe within 120 days of the agreement being established, your business will be expected to repay the lender in the debtor’s place. However, some Debt Factoring providers may offer you Bad Debt Protection as standard, safeguarding your business should such an event occur.

Should the debtor fully repay what they owe accordingly, the lender will release a balance to your business. So, for example, if you’ve released 90% of the capital tied up in the invoice, the balance will be the remaining 10% minus interest and service fees, which will equate to a loss of earnings.  

Another disadvantage of applying for Debt Factoring is that lenders may request a Personal Guarantee, which is either a written or verbal declaration of your intention to resolve the agreement on time. Debt Factoring agreements may also be subject to a Debenture, which affects the order of repayment in the event that the debtor doesn’t resolve what they owe and your business becoming insolvent.

Is your business in need of urgent support?

Making sure that your business has reliable cash flow isn’t a task that can be pushed down on the ‘to-do' list, it’s a vital responsibility that directly affects the sustainability of your venture. That’s why, if your business’ cash flow is disrupted for any reason, you must ensure that the issue is tackled head-on and in good time. This is why an increasing number of business owners are choosing to acquire the help and support of Debt Factoring. So if this is a solution that your business could take advantage of, the only thing you need to do is source an agreement from a lender you can trust, which is where we can help.

At Rangewell, we’re an Access to Finance specialist who searches over 300 lenders to offer you an overview of more than 23,000 business finance products. Our services are always free to use and we’ll also guide you through the entire application process. So if you’re looking to raise money and safeguard your business’ future, apply for a Debt Factoring agreement today or find out more with Rangewell.


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David Harrison

David Harrison

Content writer
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