Invoice financing is a quick and easy short-term finance option for businesses that need extra cash to improve their cash flow. To determine whether invoice financing is right for your business, you’ll need an understanding of the pros and cons associated with this form of alternative finance.
The benefits or advantages of invoice financing
There are five key benefits associated with invoice financing, which might make it the perfect solution for your business’s cash flow challenges:
- High drawdown
- Ease of use
Here’s a quick rundown of each benefit.
Businesses are able to opt in for a confidential facility where customers will not be made aware that their invoices have been sold. As such, businesses using invoice financing have complete control of their relationship with their customers and the process they use for collecting customer payments.
Businesses are able to sell their outstanding invoices as and when they need to. There are no lock-in contracts or a minimum drawdown. Every invoice financing transaction comes with its own discounting rates and processing fees (which are fully transparent if you use InvoiceInterchange’s services) based on the risk and terms of the transaction. This gives businesses full control over when they want to obtain financing, what the terms will be and what the price will be. This makes invoice financing incredibly popular with SMEs.
Obtaining a traditional loan. requires filling in a lot of paperwork and approval can take a long time. Invoice financing provides a cash advance in as little as one day after an invoice has been loaded into the system.
4. High drawdown
Invoice financing usually offers a higher drawdown than more traditional financing options like an overdraft, a credit card loan or bank loan. The drawdown is based on each business’s revenue. As a business grows, facility limited will be adjusted accordingly.
5. Ease of use
Invoice financing is one of the easiest ways businesses, especially small businesses, can improve their cash flow. Accessing funds through invoice financing is as simples as uploading an invoice and waiting for an investor to purchase it. Once the trade closes, funds can be advanced in as little as four hours.
The disadvantages associated with invoice financing
There are two key disadvantages associated with invoice financing that may mean it’s not right for your business:
- Invoice limitations
Here’s an overview of each disadvantage.
1. Invoice limitations
Invoice financing is pretty flexible but it involves a level of risk to the finance provider given there is a chance a debtor will never pay its outstanding invoice. As a result, most finance providers will only issue an advance against invoices that were issued to creditworthy businesses, which usually means larger businesses. If your business only ever issues invoices to small businesses, you’re unlikely to be able to use invoice financing.
In exchange for providing the invoice financing services, all finance providers will charge a fee. This is usually a percentage of the value of the invoice. This means if you choose to use invoice financing you’ll get earlier access to your money but at a cost.
Some businesses are able to counteract this by passing on the cost to their customers. Businesses that receive a discount for paying their bills early are in a great position because they can use the earlier access to cash tied up in their invoices to pay their bills earlier and receiving the discount from their supplier often compensates them for or even outweighs the cost of using invoice financing.
Is invoice financing right for your business?
Only you can determine whether invoice financing is the right cash flow solution for your business and you may want to seek advice from a qualified financial advisor before making the decision to use invoice financing. But if your business has at least one large customer or client and at least some of your suppliers offer discounts for early bill payment then invoice financing could easily be a great option for your business.