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Factoring - Advantages & Disadvantages ⚖️

Advantages ✅

  1. Improved Cash Flow: Instant conversion of credit sales into cash.
  2. No Collection Headache: Factor handles debt collection.
  3. Credit Protection: (In Non-Recourse) Protects against bad debts.
  4. No Collateral: Finance is based on quality of invoices, not collateral.
  5. Better Balance Sheet: Reduces debtors, increases cash (Liquidity).

Disadvantages ❌

  1. High Cost: Factoring fees + Interest is usually higher than bank loan interest.
  2. Customer Relations: Customers might not like a third party (Factor) calling them for money. It might signal that the company is in financial trouble.
  3. Not for Bad Debts: Factors only accept "Good Quality" invoices. They reject risky debtors.

Factoring vs Bill Discounting 🆚

FeatureFactoringBill Discounting
ScopeBroader (Finance + Ledger + Collection)Narrow (Only Finance)
RecourseCan be Non-RecourseAlways With Recourse
NoticeCustomer knows (Notice given)Customer may not know
ServiceSales Ledger Management includedNo such service

Quiz Time! 🎯

Test Your Knowledge

Question 1 of 3

1. A major disadvantage of factoring is:

Low cost
High Cost
Too much cash
None

💡 Final Wisdom: "Factoring is expensive, but for a growing business, cash flow is more important than cost!" 💸

Next up: Forfeiting - Factoring for Exporters! 🌏

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