Pros and Cons of Invoice Financing

Invoice financing is a great way for entrepreneurs to fund their businesses. But while it does offer many perks, it’s not without its downsides. So before you go for this funding option, you need to know the pros and cons of invoice financing first. Let’s start with the ones listed below.

Pros of Invoice Financing

Improved Cash-Flow

Invoice financing allows you to get the money tied from your unpaid invoices. This helps raise ready cash for your business, improving its cash flow in the process. And with better money flow, your business will be able to explore new opportunities as well as cover some of its necessities.

If your business enjoys a small group of clients who pay large invoices, then getting invoice financing is perfect for you. By choosing this funding option, you can maintain your business’ financial health even if a few of your customers end up paying late.

Immediate Funding

Traditional loans usually take several days if not weeks, especially with the paperwork and assessments involved. In stark contrast, the best invoice financing providers can set up your account within a week at most. Then the funds can be released 24 hours after that.

By leveraging your unpaid invoices, you can get funding for your business fairly quickly. This allows you to address many issues immediately, and it will help you raise money for other business expenses.

High Flexibility and Transparency

Another great thing about invoice financing is its flexibility and transparency. Most providers offer very workable repayment terms, and factoring contracts and minimal drawdowns are quite rare. You can also sell any of your outstanding unpaid invoices whenever you need to.

Moreover, invoice financing allows you to negotiate discounted rates and processing fees during the transaction. By maintaining a good relationship with the provider  company, you can potentially get great terms.

Confidentiality

Additionally, invoice financing gives you the option of keeping your transaction strictly confidential. That means your customers won’t be alerted that their invoices have been leveraged for funding.

If what concerns you about invoice financing is the possibility of your customer experiencing distrust or losing faith in your brand, then you need not worry. Through this financial instrument, you can borrow money without straining your relationship with your clients.

Low Risk for Both Parties

Finally, invoice financing isn’t as risky as other lending options. For one thing, most providers don’t require security. That means you won’t have to present property or assets as collateral. Instead, the unpaid invoices themselves serve as security. This essentially passes on the responsibility of repaying from you to your customers.

Meanwhile, financing providers can also rest easier since they are more or less assured that the money will be repaid (if not by you then by your clients). And they can minimize their risk even further by lending out the money in installments.

Cons

Borrowing Cost

While invoice financing gives you funding whenever needed, it doesn’t come free of charge. As with other lending options, invoice financing comes with certain fees. In most cases, this is a percentage of the unpaid invoice’s value.

Luckily, there are ways to minimize these borrowing costs. One example is to pass it on to your customers. You can do this by tweaking the price of your products or services a bit so it can cover the expenses you’ll incur from invoice financing. Alternatively, you can take advantage of the discounts that come with paying your bills early. Businesses that do this can use the money they save to mitigate the costs of borrowing money through invoice financing.

Relatively Hard-to-Obtain

Although invoice financing is a great option for businesses to get additional funds, not every entrepreneur can make use of it. Most providers only entertain businesses that serve other businesses, as well as companies that enjoy a substantial turnover. If your enterprise is neither of these, then you may find it difficult to get funding through invoice financing.

Still, that doesn’t mean you can’t try getting invoice financing. If your business has a decent financial track record, then there’s no harm in applying. All you need to do is demonstrate it to the lender, as well as follow their strict ground rules. Just make sure to check their fees as you go.

Limited Financing Solution

Despite its benefits, invoice financing is still a band-aid solution that won’t solve all your business’s financial problems. Yes, it will help improve cash flow to a certain degree, and it will certainly enable you to explore new opportunities. But If you want to keep your business healthy in the long run, you shouldn’t rely on it solely.

For example, if you need to get new equipment or machinery, then other lending options would be better. Furthermore, while you can use invoice financing to pay employees and suppliers, relying on it too much isn’t recommended.

Leaner Concurrent Funding Options

By getting invoice financing, you’ll essentially limit your other lending options as well. Certain moneylenders require unpaid invoices and other forms of account receivables as collateral. Since you’re already leveraging it at provider companies, you won’t be able to use them as security elsewhere.

Even so, there are a lot of financing options out there that will provide you with funding simultaneously with invoice financing. All you need to do is pick the right ones.

Risk of Disclosure

And even with strict confidentiality terms, your clients could still find out about your invoice financing transaction. This can potentially sour your relationship with them, putting them off from doing business with you in the future.

To prevent this, make arrangements with the invoice financing provider so that you’ll still be the one in charge of collecting payment from your customers. Otherwise, they’ll assign the task to a factoring company, and your clients will inadvertently find out about your transaction.

Final Thoughts

To properly determine whether or not invoice financing is suitable for you, you need to weigh its pros and cons first. So before visiting the nearest  provider, make sure to learn what’s good and bad about it.