Contrary to popular belief, business invoice financing is not a business loan, but rather an advance against your business’ pending invoices – money your customers already owe you. Through this process, you sell your outstanding invoices to a factoring company, and the factor will pay you a lump sum – typically 70%-90% of the total value of your invoices. Once received, the funds can then immediately be used as working capital. The factoring company collects payment for the invoices, and typically charges a small fee for the services rendered.
There are many reasons why business owners apply for invoice financing, but just like any other type of financing, it has its own set of pros and cons.
Pros of Business Invoice Financing
Higher Rate of Approval: Unlike traditional business loans, credit score, loan history and collateral are not major determining factors for invoice factoring. The pending invoices act as collateral, which means the factoring companies are more concerned with your customers’ payment history, as opposed to yours.
Outsourcing: Keeping track of your invoices and contacting customers can be taxing. With invoice financing, the factoring company will be the one to keep track of your invoices, leaving you with added time to focus on more important tasks.
Continuous Cash Flow: As long as your business has pending invoices, you can continue to use invoice factoring. Instead of waiting months to receive payment on outstanding invoices, you can receive the money on your terms which enables you to maintain a steadier cash flow.
Immediate Cash Flow: The process of applying for traditional business loans is long and tedious – sometimes it takes months before you’re approved. Invoice factoring offers immediate access to cash, ensuring your business operations continue to run smoothly.
Cons of Business Invoice Financing
Customer-Reliant: Lenders may not be too particular about your business’ financial history, but they will take your customers’ payment history into consideration before approving your application. Therefore, if your customers have a bad payment record, it could negatively impact your chances of having the factoring company take on your invoices.
Fees: Factoring companies typically charge around 1% to 5% of your invoice’s total value. Before you consider invoice financing, you need to determine whether fast access to capital are worth the fees.
Liability: If your customers default on their invoices, you may be held responsible. Factoring companies are not collection agencies, which means they won’t waste their time tracking down your customers who fail to pay on time. If you’re in a recourse invoice factoring agreement, you’ll bear the burden of paying for those invoices. Some factors may allow you to trade one invoice for another of the same value, but that is dependent upon the factor.
If you want to know more about business invoice financing, the experts at SMB Compass can help you, and answer all your questions. Our invoice financing rates start at 0.75% per 30 days.
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