When computing the costs of factoring, you may be able to shift the costs of bookkeeping, collection and bad debts to the factor. Factoring also provides immediate cash which may have been tied up for months, so there is a net present value computation to be made when evaluating a factor proposal. Factoring may be a useful adjunct to existing bank relationships. In fact, factors are experts in credit analysis. This will establish confidence in the ability to collect the accounts receivable.
Factors assume all the credit risks associated with accounts receivable.
Factors allow firms to utilize all available cash for revenue generation. In addition, certain factoring arrangements can free cash that would otherwise be set aside to meet projected current obligations. If lenders and investors are confident that a factoring organization will purchase the accounts receivable of a firm if the cash is needed, they will be more willing to provide assistance. On the other hand there are disadvantages to selling all your receivables. Good customers may not like the fact that you have sold their paper.