Factoring: Its Advantages and Disadvantages

A merchandise concept brings about a collection of items and products and price points that own and run unique brands and represents a highly perceived and also defined need that most times resonates with the targeted audience. It starts with the understanding of the benefits the product brings to the target audience. The definition of Factoring, factoring is a service in which a company or business in a transaction sells its receivables or invoices to a third-party company. The major reason why the fashion companies, for instance, Viktor & Rolf will deem it fit to use factoring is to get the cash fast rather wait for thirty to sixty days. The third-party company is known as the factor. The paper shall provide substantial details on factoring, its advantages and disadvantages in Maison Margiela, Marni and Viktor & Rolf retailing companies.

Maison Margiela is a fashion company with roots in France. Founded by a Belgian designer by the name Martin Margiela. Viktor & Rolf is a fashion house that offers clothing, shoes, perfumes, apparels and other accessories under the brand Viktor & Rolf. Marni is also a fashion house that produces clothing that is ready to wear, eyewear, jewelry, handbags and other accessories. The three companies have a thing in common they are dealers in fashion and characterized by clothing, perfumes and other accessories that encompass the fashion industry (Burns, Mullet & Bryant, 2016). They are retail companies that use some ways to raise revenues, and in this case, the analysis is solely on the factoring services. The companies make use of factoring to be able to receive their cash quickly from their products and the market wares that they sell. The factoring process is necessitated most times by the protracted delay that may ensue for instance may take up to 60 days for these companies to receive payment from their clients.

The business sectors that benefit from the factoring of services include the construction, logistics, security firms, staffing agencies, manufacturing companies and healthcare businesses. The garments or the fashion industry fall under the manufacturing sector require the services of the factors to be able to receive their cash earlier to be able to increase their cash flow (Dabija, Szentesi & Pop, 2014). They make fashion products with their pricing, and this makes it possible for them to make use of the factoring services. They have shared advantages and disadvantages for both the client and the factor.

The advantages of factoring for both the client and the factor include First, Releases cash immediately. The clients benefit because they get access to the funds instantly. The fast access to the cash makes it easy for them to run the operations of the three fashion companies. The factor also benefits from being efficient which allows the factor to be able to track the payments of the invoices from the customers fast. Second, saves time and use of resources. The client as well as the factor benefit from timely and efficient timelines. The client will access the cash on time which is important to have cash flow in the fashion industry. The factor also will be a point of an advantage because minimum resources will be required and will also maximize profits.

The third advantage, Expansion is quick with their growth. The factor can assist to easily expand the financing of the fashion company as the business continues to grow. The growth of the client also translates to the growth of the factoring company, for example, a factoring company dealing with a large audience will reap more benefits as long as the factoring company is big enough (Salinger, 2014). Fourth, Boost the cash flow. The client will reap enormous benefits when the company receives the receivable payments, and this will play a major role to ensure its growth. The factor will benefit from the many deals that will, in turn, translate into more revenue for the company offering the factoring services to the three fashion companies, Maison Margiela, Marni and Viktor & Rolf.

Fifth, the factor will grow with the client. When the amounts in the invoices increase, this will mean good business for both of them and will bear more benefits. Sixth, Factors will be able to check the customer's credit levels, and this will help the companies to trade with better customers who meet the standard and quality. Both the factors and the client benefit from transacting with the creditworthy customers who will for sure pay for the products.

The disadvantages of factoring for both the client and the factor include. First, it is more expensive than a loan from a bank. The expenses arising from the transactions work that involves the invoices the factoring firm will undertake to advance large amounts of cash more quickly. The costs pose a challenge to both of them because, for instance, this means a reduction of profits on the part of the fashion companies to facilitate this process. Also, the logistical challenges on the part of the factoring company. Second, difficult to leave the factoring agreement when you need to. The agreement cannot stop just as the client or the factor wants because there are many transactions at play. The failure to leave may be detrimental to the fashion business in this case and may bring about a decline in the profits.

Third Disadvantage, disputes, and numerous queries pose a challenge to your available funding. It is a major challenge that is like a stumbling block that prevents the quick flow of cash. The challenges that arise pose a major problem for instance in the three companies that will require paying their suppliers who supply the textiles and other support services and raw materials. Fourth, the factoring company will restrict the funding that comes from the poor-quality debtors who will, therefore, require management of the funding fluctuations. The restriction may prove double jeopardy for both the factor and client if not addressed and may lead to high losses. Fifth, factoring shrinks when business contracts. Factoring will not be a good choice for the businesses that operate on seasonality or that face fluctuations in the revenue they collect. The problem is both for the client and factor, for instance, the profits will decline, and for the factor, they may face a decline in their revenue.

The examples of factoring are two installment factoring transaction and single installment factoring transaction. In the two-installment example, a client submits an invoice. The factor then processes the invoice. Afterwards, they deposit the cash to the client. After about thirty days the clients makes the payment. The factoring company comes in to ensure it processes the payments. In the single installment, the fashion company submits the all the delivery paperwork and freight bill to the factor. The factor then advances and then deposits the cash to the bank account owned by the client. The remainder is the fee.

Conclusion

In conclusion, Maison Margiela, Marni, and Viktor & Rolf require the factoring services to be able to ensure effective cash flow. The efficiency or limitation of the factoring services on the fashion companies is dependent on many factors that may include for instance the size of the company and the targeted audience. Factoring in some sectors is essential and helps the companies even to be able to assess the creditworthiness of their customer base.

References

Burns, L. D., Mullet, K. K., & Bryant, N. O. (2016). The business of fashion: Designing, manufacturing, and marketing. Bloomsbury Publishing USA.

Dabija, D. C., Szentesi, S., & Pop, N. A. (2014). A customer-oriented perspective on retail brand equity in the fashion industry.

Salinger, F. R. (2014). Factoring: the law and practice of invoice finance. Sweet & Maxwell.