A constant stream of cash flow is essential for any business organization to meet its operational needs and demands. But your business cash flow could be affected if you have immoderate working capital that already tied up in your inventory and receivables.
To aid you during such a situation, ‘Invoice Financing’ offers a way to raise liquid finances by mortgaging or selling your unpaid bills and invoices. This liquid cash can then be used to cater your business’s short-term needs such as paying off critical debts, investing in infrastructure, pursuing growth targets and boosting sales volume etc. The most common way to structure the invoice financing is through factoring or discounting.
However, at the same time, it’s also imperative to be aware of some demerits of invoice financing that can be counterproductive to your business. In this article, we’ve tried to showcase some major pros and cons of invoice financing to help you make an informed decision:
Pros of Invoice Financing
- Higher short-term liquidity
Invoice finance is highly liquid in nature. It allows you to boost the cash flow of your business by releasing funds locked in unpaid invoices. In this way, your working capital requirements can be immediately fulfilled by mortgaging or selling the unpaid invoices instead of having to wait for payment by the customers.
- Quick and easy to secure
Invoice finance is quick and easy to secure, since lenders only calculate the value of your invoices for lending the funds rather than evaluating your business’s financial health and credit history. Usually, these loans are disbursed by the lender within 24 to 48 hours after receiving your unpaid invoices. It means that through invoice financing, you can get access to immediate working capital.
- Business security
When you avail of invoice finance, the lender takes charge of all the unpaid bills and is responsible for collecting payments from the customers. This eases your payment collection concerns and minimizes the chances of default or late payments. Moreover, the factoring company will also conduct a thorough credit check on your clients using the SIBIL score to ensure that they are reliable and trustworthy.
- Secured business loans
Invoice financing is a secured method of raising the working capital finance of your business. However, any of your business property or assets remaining unaffected as the unpaid invoices only act as the collateral for availing these funds. Also, since these loans are secured business loans, lenders ask for lower rates of interest when compared with other unsecured types of loans.
Besides these above, there are numbers of other benefits of invoice financing
Cons of Invoice Financing
- Expensive in the long term
Invoice finance can be expensive in the long term due to the fees and interests that continue to get higher, the longer the invoice remains unpaid. This type of finance is not for new business entities as their profits can’t sustain extravagant interests and maintenance charges.
- The risk of exposing your financial condition
Most businesses resort to invoice financing to meet urgent cash flow requirements. However, partnering with an invoice factoring company can expose your financial situation to your customers, since the invoice payment collection is done by the factor.
- Damage relationship with clients
Opting to sell or mortgage the unpaid invoices instead of waiting for clarity on payment from the customers, might indicate that you don’t trust that they will pay. This might adversely affect your professional relationship with the client.
Now that you know the merits and demerits of invoice financing, you can take an appropriate decision based on your company’s needs and preferences. Ideally, it should be used only when you need urgent liquid cash rather than a regular process for boosting capital.