Have you ever considered trading your invoices to fund your business? Recent reports show 60% of small business owners face cash flow problems on a yearly basis. Invoice factoring and invoice financing are not so new in the market and many of these small business owners facing a cash flow gap choose these options to fund their business.
In fact, did you know invoice factoring was used during the Roman Empire and Phoenicia? Merchants were using factoring since then to finance their business operations. Today, invoice factoring is a popular method used by many business sectors and the demand for this service is increasing every year.
Are you facing cash flow problems with your business? Are you looking for more clarity on invoice factoring to grow your company? In this blog post, you can read more about the following aspects before choosing invoice factoring and invoice financing.
Cash Flow Gaps
What Is Invoice Factoring And Financing?
Advantages Of Invoice Factoring And Invoice Financing
Disadvantages Of Invoice Factoring And Invoice Financing
Cash Flow Gaps
Cash crunch can be a result of many reasons. A sudden shoot up in the price of utilities and supplies or even a natural calamity can cause your business to face a cash gap. These cash flow gaps, in turn, can make your business run slower, tied up cash in inventory and delay the payments. Such problems delay the timely achievement of targets by small businesses.
To be back on track, small businesses look for opportunities to fund their businesses. There are different options to choose from such as bank loans, merchant credit line, growth capital, invoice factoring, and invoice financing. During these times, when your business is facing an unexpected pause, it is important to have a quick source of finance.
When your business is facing a cash flow shortage and you hold outstanding invoices, invoice factoring can be the right choice for you. Invoice factoring is a common practice used by business owners in order to get funded immediately and without collateral. That being said, invoice financing and invoice factoring is no more a new term in the market nor are invoice financing institutes.
What Is Invoice Factoring And Invoice Financing?
Invoice financing is a method of financing your invoices to a third-party in order to avail funds based on your outstanding invoices. The third-party involved here is known as a factor and the process is called invoice factoring. A factor can be a person, company or a financial institute.
In invoice factoring, you are selling your existing unpaid invoices to a factor. The factoring company credits you with an upfront payment on the basis of the invoices submitted. The factor then sets to collect the payment directly from your customers. Once your customer settles the invoices, the factor pays you the rest of the amount minus a fee.
Invoice factoring can be an effective tool in getting your business running with a good pace while facing cash flow gaps. But, before you make a decision, it is important to be aware of the advantages and disadvantages of Invoice Factoring and Invoice Financing.
Advantages Of Invoice Factoring And Invoice Financing
Invoice factoring is one of the easiest and fastest forms of raising funds for small businesses. There are other advantages of using invoice financing and invoice factoring.
Easy Application Procedures
Once you have decided to sell your invoices, you need to apply to a factoring company, and they assess your credits. This procedure doesn’t take months to complete and that avails immediate cash flow. With the advancement of around 80-90% of your invoiced amount soon after the approval of your application, your business can soon be back on track.
Having an online application process makes the tasks hassle-free of submitting paper forms. The use of automated software helps with fast processing and assessment of your application.
Having an asset as collateral when you are facing a cash crunch can be challenging. Most of the other methods to gain funds ask for the submission of collateral to move the application process. This is where invoice factoring benefits you with providing funds without any collateral.
Other than your invoices, an invoice factoring company doesn’t require any material possession as collateral from you. This is very beneficial, especially for a small and medium enterprise. However, the quality of your customer does matter in getting approved by the factoring company.
Direct Payment Collection From Customers
A factoring company collects payments from your customers directly. This allows you to let go of keeping up with the payment schedules. With a factor professionally handling all the collection procedures for you, you can have an organized report on your customers’ payment records. This also comes with a huge benefit of time-saving.
Additionally, with funds and required time in hand, you can concentrate more on your business growth.
Disadvantages Of Invoice Financing And Invoice Factoring
On the other hand, invoice factoring comes with a few disadvantages too, and it is important that you are aware of them.
Meeting Eligibility Criteria
Even though the application procedure for a factoring company is relatively easy, but there are a few qualification criteria put forward by different factoring companies. These terms and conditions are for the smooth functioning of financial services from both ends. However, meeting these criteria can be a little challenging if you are not keeping your records clean. The problems in this part can be easily avoided by having a good record of your credits and using automated software like QuickBooks and Lazada, to keep track of your expenses.
Financing costs generally would take a chunk of your profits between your service fees, factor rate, credit check fees, origination fees, and others. These can cut down a certain amount from your total invoiced amount. Therefore, invoice factoring or financing may turn out to be expensive for you. Before going ahead with a factoring company, make sure they don’t have any hidden fees at different stages of the financing process. Also, the finance fee varies from company to company.
Financial Situation Being Exposed
With a financial institute directly collecting invoices from your customers, there is a chance for customers to assume about the cash problems your company is facing. Since businesses usually take advantage of factoring companies in times of cash crunch, your financial situation can get exposed. This concept is changing now with more companies keeping a long term relationship with factoring companies to maintain steady cash flow.
Invoice financing and invoice factoring can be helpful in overcoming your cash flow problems. An imbalance in your business’ financial situation can adversely affect the process of achieving your desired business targets. Invoice factoring and invoice financing where you can sell your outstanding invoices to a factoring company can fix these cash flow challenges by providing quick funds.
Invoice financing and invoice factoring come with a bundle of advantages that can help you with growing your business. However, there are a few drawbacks to these services too. It is important you choose the financial service and financial institute with respect to their terms and conditions that will solve your immediate financial problems.