The Pros and Cons of Invoice Financing - image  on


The Pros and Cons of Invoice Financing

invoice financing

The Pros and Cons of Invoice Financing

Every business faces the challenge of managing its cash flow. If you’re struggling due to extended payment terms, consider using Invoice Finance to help inject cash into your business. This method of raising capital is different from a business term loan or line of credit. Invoice Finance utilizes outstanding invoices to secure funding based on the value of the invoice. Rather than waiting for 30 or more days to receive customer payments, you can receive a cash advance of up to 90% of the invoice value within 24 hours of billing your customer. In this guide, we will examine the pros and cons of using invoice financing and discover the reasons why it’s not suitable for every business. 

The Pros of Invoice Finance

Invoice Finance is a unique type of business funding method which raises funds from within by utilizing its account receivables, rather than taking an external loan. It can be a form of financing strategy for businesses to cushion short term cash flow crunch and offers numerous benefits compared to other financing solutions. Let’s take a closer look at the advantages. 

1. Improved Cash Flow

Invoice finance enables companies to convert their unpaid invoices into cash. The funding can be received the same day the invoice is issued. This helps businesses to unlock capital tied up in their accounts receivables to solve their short term cash flow issues like paying suppliers, salary, or rental, and take advantage of opportunities to grow their business. 

2. Increased Availability of Funds

Unlike traditional loans, businesses do not need a perfect credit score to qualify for invoice financing. Rather, its success is based on the value of its outstanding invoices, making it easier to access funds than traditional bank loans. 

3. Flexibility Invoice financing offers a great deal of flexibility.

Businesses have the option to sell one invoice or multiple invoices, enabling them to take on only the amount of funding they need. There are also no restrictions on how a business uses the funds. 

4. Lower risk 

Invoice financing is less risky compared to other forms of financing. Unlike a traditional loan or line of credit, the lender do not require additional collateral as the financing is based on the value of invoices. The only collateral needed to access the funding is the business’s outstanding invoices. This is good for business owners who do not want to risk their assets such as properties or fixed deposits as collateral for business financing.

5. Raise Cash Without debt 

Invoice finance is not a form of debt, meaning there are no repayments required. Instead, businesses simply sell their invoices and receive funding in return. This helps businesses avoid taking on extra debt or increasing their monthly repayments. 

6. Fast Access To Funding

An invoice financing facility can be arranged within a few days allowing access to funds as soon as the day after the invoice is submitted. This enables you to rapidly obtain the necessary capital to cover expenditures or finance a potential venture.

7. Accessible to Businesses with Poor Credit Scores 

Since invoice finance is based on the value of a business’s outstanding invoices, it is not dependent on a company’s credit score. This makes it an ideal financing solution for companies with poor credit scores, enabling them to access funding that would otherwise be unavailable to them. 

8. Improved Relationship with Suppliers 

Invoice finance enables businesses to pay their suppliers in a timely manner, which can help to improve their relationships. In turn, this can lead to better trade terms, discounts, and other business advantages. 

9. Accessible to New Business

Invoice financing is a great funding source for startups or new businesses as long as operation history is not part of the lender’s credit management criteria. 

10. Increase Revenue

It is not unusual for many industries to offer payment terms that stretch over 30 days, you may lose out on sales if you are unable to meet your competitor’s terms and offer these terms to your customers. Invoice financing allows you to offer extended payment terms and win new customers without worrying about the impact on your cash flow.

11. Outsource Collection

Chasing payment is a headache for many businesses, the ability to outsource collection is one of the advantages of invoice financing. Businesses can let the finance provider collect payment while focusing on growing their business.


The Cons of Invoice Financing

Invoice Finance can unlock the funds tied in your invoices and bring numerous advantages however, it may not be suitable for all types of businesses. There are certain drawbacks that business owners should take into account before determining whether invoice financing is suitable. 

1. Cost

By choosing to finance your invoices, you will be increasing the cost of operations and reducing the total revenue your business earns per sale. The funding agreement with the lender includes fees and a deduction from the invoice value until your customer settles their payment. The typical invoice financing interest rate ranges from 0.5% to 2% per month. Although fast access to funds can be advantageous for most businesses, those with thin profit margins may find alternative financing options to be more beneficial. 

2. Commercial Invoices

Invoice financing is designed to help businesses in the B2B segment, if you are in the B2C business segment, alternative financing options like a line of credit or a business term loan may be a better option.

3. Funding Limited by Outstanding Invoice Value

The amount of funds available to you is determined by the value of your unpaid invoices that you offer as collateral. It also implies that you might not be able to secure enough funding for a significant one-time expense or investment such as purchasing a property or equipment and machinery. In such cases, you may find that a Commercial and Industrial Property Loan or Equipment And Machinery Loan is a better fit for your requirements, particularly if you intend to acquire a property or machinery.

4. Receivables Reduce During Lull Season

If you depend on invoice financing to raise funds to tide through the lull season, the funding will be limited as it is tied to your account receivables. Alternative financing options for your business should be considered in case you need extra funds. 

5. Customers May Be Aware of Financing

Your customers may be aware of your relationship with the financing company if you outsource the collection of your account receivables as the lender’s collection team will communicate directly with your customers for the payment. Some customers may perceive your company to be financially weak in this instance. The perception of financial weakness can arise if customers believe that your company is unable to manage its own cash flow or collect payments on its own hence affecting the positioning of your company.

6. High Risk Customer

Invoice financing company will assess both you and your customers’ creditworthiness. Financier may not be willing to work with you if your customers are deemed high risk and have poor credit scores from late payment or defaulting on payment. 

Why Is Invoice Financing Not For Your Business?

While invoice financing can be an effective way to raise funds for your business, it may not be the best option for every business. If your business has at least 2 years of operating history with good credit scores, alternative financing options such as a business term loan or line of credit may be a better option as they offer a lower interest rate. The cost of borrowing can be further reduced by using a property loan.

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