Small businesses have potentially several viable choices of lending to grow their business. Whether it’s through a regular bank or an alternative lender, it’s important to look into all possibilities before choosing which is best for your business model and future growth. The crucial component of success is determining where and how you intend to obtain the required funding.
Many businesses are turning to invoice factoring as their main source of company funding. Invoicing factoring is the process of selling your accounts receivables/ book debts to an alternative lender. Rather than maintaining them in your company’s bank account or on the balance sheet of a third party.
Pros of invoice factoring
Invoice factoring is a common funding option. It provides immediate cash flow to meet short-term financial requirements. When businesses sell their invoices to the factoring provider, they typically get advanced up to 90% of the gross value of the invoices and once the customer pays the remaining amount is transferred to the company, meaning fewer fees for the client.
Invoice factoring requires less collateral as no tangible security is required. It also generally has a faster approval procedure than standard bank financing. Customer credit checks and general risk assessments are performed, along with credit control saving the business time, money and potential losses trading with on poorly rated customers.
Because the financing line will quickly grow as invoice sums increase, invoice factoring can become the cornerstone of a company’s finance strategy. Factoring may be especially appealing to businesses with high-quality clients that want fast cash flow and are ready to pay the accompanying expenses.
Cons of invoice factoring
While the concept of using invoices as a form of payment may seem obvious, they are often not the best solution for all industries. Invoice factoring only works for businesses that are making money, it is not a lifeboat for failing unprofitable businesses
Additionally, when selling your invoices to a factor, the factoring company will be in touch with your customers, some businesses may not want this interaction.
Invoice factoring is a brilliant funding option for businesses of all shapes and sizes. It’s important to consider your options and what works best for your specific scenario if you’re thinking about using invoice factoring or a business loan.
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