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What are some of the disadvantages of accounts receivable factoring?
Answered By Editor
Before entering into a factoring agreement,
it is good to know the disadvantages of this
type of arrangement. On the surface, the
primary disadvantage is cost. Under a
factoring agreement the factoring company
purchases accounts receivables at a discount.
Depending on that discount amount (usually
around 25%), it could be a disadvantage to
the business selling the account.
Bad debt liabilities are also a potential
disadvantage if the business has entered into
a recourse factoring agreement. Under this
type of agreement, the original owner of the
account is responsible for any amounts that
cannot be collected from customers. Although
the discount rate at which the factor
purchases the accounts is usually lower,
depending on several factors, the potential
charges for uncollectible accounts could be high.
Another disadvantage is the potential for
poor customer relations. Since a third party
will now deal directly with your customers to
collect amounts owed, this can have a
negative impact on customer perception and
loyalty. This can be especially true if the
factoring company engages in aggressive or
unprofessional practices when collecting
receivables.
keywords: Factoring | Debt Factoring | Invoice Discounting | Accounts Receivable | Cash Flow | Factoring Company | Accounts Receivable Factoring
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