<img height="1" width="1" style="display:none" src="https://www.facebook.com/tr?id=349935452247528&amp;ev=PageView&amp;noscript=1">
Search
word-map-thumb

The Alternative Board Blog

The Pros and Cons of Invoice Financing

Dec. 23, 2020 | Posted by The Alternative Board
Financing

Businesses are often haunted by customers who consistently pay their invoices later than expected, or by those who don’t pay at all. A great deal of time, effort, and resources can be consumed by chasing after delinquent accounts receivables, while the effect on cash flow can become a big problem in itself.

Enter the world of invoice financing, “a form of asset-based financing and a way for businesses to borrow money against the outstanding invoices from customers,” according to Nav, a business lending advisory firm.

How does invoice financing work? The simplest form is known as invoice factoring. Generally speaking, a business sells its outstanding invoices to a factoring company, which in turn pays the business a set sum, usually between 70% and 90% of the invoices’ total value. The factoring company assumes the role of payment collector, charging a fee for the services they provide (frequently, a percentage of the amount of the invoices).

Invoice factoring

Pros

Unlike conditions surrounding a traditional business loan, with invoice factoring, a cash-strapped business has almost immediate access to cash. A company’s credit score or loan history aren’t usually involved. Plus, there’s no long waiting periods for approval, once a factoring company decides to purchase the outstanding invoices.

Invoice factoring can become a staple of a business’s ongoing cash-flow strategy. Since the emphasis on the value of the invoices, the invoice financing line “can easily increase as your invoices increase in value, given that your clients remain creditworthy,” notes SMB Compass, a business financing company. Such a financing option “is great for rapidly growing companies needing financing to keep up with the rate of growth.”

Want additional insight? Download Hiring a Business Coach for Your Small Business now 

DOWNLOAD

In general, business owners aren’t fond of tracking the status of invoices and chasing after customers who are late or delinquent in payment. With invoice factoring, that burdensome task falls on the factoring company.

Cons

Invoice factoring isn’t cheap. Charges for the service may include credit check fees, as well as application and processing fees. Generally speaking, the charge is between one percent and five percent of the invoice’s total value—an important consideration for businesses needing quick access to capital.

Factoring companies closely examine customers’ payment record when determining whether or not to assume control of a business’s invoices. “If your customers have a habit of not paying on time,” notes the financing company Fora, “the factoring company will assume they won’t be paid on time either and will be less likely to take on your invoices.”

When it comes to debts, some businesses don’t care to relinquish total control to a third-party service provider. They worry about an invoice factoring company contacting their customers directly, in pursuit of payment.

Invoice financing

Invoice financing is a bit different from what’s been described above. As Fundera explains, the lender “gives you a portion of your unpaid invoices—usually 80% to 90%--up front, in the form of a loan or line of credit.” When the customer pays the invoice, “you’ll pay the lender back the amount loaned plus fees and interests.” Your business retains responsibility for collection of outstanding customer payments.

The pros and cons are similar to invoice factoring. On the plus side, getting cash up front lessens the pressures a business may experience when faced with outstanding accounts receivables. Having a low credit score doesn’t necessarily disqualify a business for this type of financial assistance; rather, invoice financing companies focus more on the credit scores of that business’s customer base.

Again, invoice financing may be too costly for some businesses to handle. And companies that don’t like third parties contacting their customers may feel that the potential negative impact isn’t worth access to capital.

Want to learn more about coping with the challenges of consistent cash flow? Register for our free TAB Boss Webinar, “Working Capital Financing Strategies: How to Increase Your Cash Flow.”

Read our 19 Reasons You Need a Business Owner Advisory Board

DOWNLOAD

Written by The Alternative Board

Related posts

5 Ways to Boost Cash Flow in 2022
Jan. 5, 2022 | Posted by The Alternative Board
We’ve said it time and again—the state of a company’s cash flow is among the most significant metrics that every CEO or business owner should track. That’s because cash flow “is a key indicator of...
5 Cost-Cutting Tips for the New Year
Jan. 3, 2022 | Posted by The Alternative Board
In 2022, businesses will continue to adapt to changing conditions in the global marketplace. But as much as things change, certain operational fundamentals remain the same. Key among those...
Financial Reports Every Business Needs
Dec. 15, 2021 | Posted by The Alternative Board
For the smooth running of a small business, no paperwork may be more essential than financial reports. These documents inform business owners and CEOs about the success or lack of success in past...
Use Customer Feedback to Pivot Your Business
Nov. 17, 2021 | Posted by The Alternative Board
The global pandemic has prompted a wide range of businesses to pivot and repurpose their products and services in new ways. Changing market conditions often mandate that businesses evolve (whether...
Increase Online Traffic by Improving Your Website’s Design
Oct. 12, 2021 | Posted by Emma Carter
  You need a website if you’re selling products and services online. This is an excellent marketing tool that can be used to attract potential leads and customers. However, what if you’re not...
How to Reduce Organizational Complexity and Boost Productivity
Sep. 2, 2021 | Posted by The Alternative Board
  As in our daily lives, the world of business has grown a great deal more complex in recent times. Generally speaking, every organization finds itself challenged by innovations in technology,...
Why You Might Want to Sell the Family Business
Aug. 4, 2021 | Posted by The Alternative Board
Regardless of the type of business or industry, issues around succession planning must be faced sooner or later. This is particularly true when you’re looking at the sale of the business, as opposed...
Use Your Company Culture as a Competitive Advantage
May. 18, 2021 | Posted by The Alternative Board
Every business needs a competitive edge, whether it’s in the quality of their products or services, their dedication to customers, or some other aspect they can leverage to outdo their competitors....
How to Sell During Times of Uncertainty
May. 6, 2021 | Posted by Phil Spensieri
If your business is struggling right now, you may be wondering if there’s anything you can do to improve your sales. While there’s no guarantee that any specific strategy will accomplish this during...
Tips on Effective Business Succession Planning
Apr. 27, 2021 | Posted by The Alternative Board
With many family businesses, the time to think about succession planning starts on Day One. It’s a complicated subject, sometimes fraught with emotional baggage, but is critically important,...