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What Are the Benefits and Risks of Invoice Factoring?Business owners are often receptive to creative ways that they can secure loans from financing companies. Invoice factoring, also known as accounts receivable factoring, is an alternative form of funding that has grown in popularity. Factoring is a collateral-backed loan, with the collateral being the business’s unpaid customer invoices. The lender purchases the invoices and receives payments from the borrower’s customers in order to be reimbursed for the loan. While there are benefits to using factoring to create a loan agreement, creditors should also understand the risks that may be involved.

Benefits

Factoring gives creditors more flexibility when working with a business client that does not have a strong credit history. From the borrower’s perspective, they are quickly turning their invoices into cash that they can use for immediate expenses. From the lender’s perspective, they are purchasing current customer invoices and could be repaid for the loan in a matter of months, depending on when the invoices are due. If the process goes smoothly, the creditor will have created a successful business relationship with a client that may not have qualified for a loan otherwise.

Risks

There is potential for a factoring loan agreement to go wrong, leaving the borrower unable to repay the loan. Most of the risks stem from the fact that the lender must collect money from the borrower’s customers, who may not cooperate for several reasons:

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