For certain companies, the financing of invoices may be exactly what they need, but there may be another side to consider in this contractual arrangement.
Advantages of Invoice Financing
Stabilization of cash flow
The key reason for companies and SMEs to opt for Invoice Financing is to produce and retain their cash flow. Having access to the funds, otherwise easily caught up in invoices, enables the company to be in a better position to cover the costs. It also makes way for company to grow and pursue new opportunities.
Extended payment terms
Having to wait for invoices to be charged between 30 and 90 days, the development of a company can be stunted. Especially in smaller companies. However, clients are less likely to participate in a company that has a payment period that is too short. This is where Invoice funding enables companies to comfortably state longer terms of payment while preserving cash flow.
Simple to achieve the qualifications
Unlike other business loans or SME financing options, it is exponentially easier for companies to apply for invoice financing as long as the company does not have an adverse credit record.
No Collateral Needed
Most financiers offering invoice financing do not involve the provision of assets as collateral, otherwise known as protection. In certain instances, the invoice itself serves as leverage making this funding solution more accessible than many other financing items.
Credit limit grows with the business
When applying for a business loan, the conditions for the accepted amount are dependent on your business income and your credit score. However, the amount you borrow against the invoice is dependent on the total amount of the invoice. Despite being able to fund only up to 80% of the invoice value in certain situations, the truth remains that you would have access to more money than an overdraft or bank loan.
No Liabilities defaults
As discussed earlier, the use of this funding mechanism makes it easier for companies to manage their cash flow. Make it possible not to default on any obligations, such as covering the overheads on schedule.
Disadvantages of Invoice Financing
Commercial Invoices Only
Invoice funding is a purely B2B (business-to-business) financing mechanism, which ensures that only invoices from other companies can be financed by financiers. If your SME works with the general public in a B2C (business-to-consumer) format, you will not be qualified.
Client Relationships
Depending on the type of the invoice financing available, you can effectively shift responsibility for managing your invoice payments to a third party. Any of the customers may not be too friendly about this new setup. Remember to really justify your logic, and maybe even let them know in advance.
This solves half a dilemma
Invoice financing is primarily intended to address the issue of inadequate cash flow. If your clients or consumers still pay their invoices on time and under fair terms of payment, you will not require this service. Therefore, if your company simply lacks access to finance for such reasons, you're going to have to go a long way for business loans and financing.
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