Invoice factoring is financing that comes from a business selling its accounts receivable to a factoring company or bank, the amount available generally depends upon the invoice volume.
Advantages of invoice factoring
1: Planning for growth
Many small businesses fond it hard to get traditional bank lending, but invoice factoring makes it less risky not only for the bank but also the borrower.
This makes business expansion easy in terms of confidence that liabilities will be met, the capacity to purchase additional capacity assets and hiring of excess staff to meet the demand. Invoice factoring is a safe way to fund growth without risking an existing positive cash flow situation.
2: Fast access to cash
Cash is advanced within 24hours of an invoice being set in general. This fast access enables you to operate the business effectively on cost compared to the usual 30 or 60-day time lag between invoice dispatch and receipt of money.
3: No limit on available borrowing.
Your borrowing limit is tied only to the number of approved invoices sent out, meaning you are not dependent on long credit checking procedures and paperwork to obtain funding when you need it.
4: Low risk for both parties
Invoice factoring is a low risk for both parties. You don’t need any personal guarantees, also the factoring company is in charge of collecting payments and its likely to have all the efficient procedures in place.
Disadvantages of invoice factoring
1: Operational changes.
Some agreements result in changes to the way in which the business is run. This can be the case if one or two of your customers are not sufficiently creditworthy or you are not maximizing opportunities within the market.
2: Customer service
Factoring your invoices could damage your image if customer relationship is a feature of your business this is because customers may take exception to place their debts in the hands of a third party.
3: Complex exit process
This means it might be difficult to exit a factoring agreement due to the sudden drop levels of the cash coming in. This should be well managed but it’s not an insurmountable problem.