The Benefits and Drawbacks of Invoice Financing

Invoice financing is a quick and simple short-term financing option for businesses that require additional funds to improve their cash flow. To decide whether invoice financing is right for your company, you must first understand the benefits and drawbacks of this type of alternative financing.

The Benefits of Invoice Financing

There are five key advantages to invoice financing that may make it the ideal solution for your company’s cash flow problems:

  • Confidentiality
  • Flexibility
  • Speed
  • Significant drawdown
  • Simpleness of use

1. Confidentiality

Businesses can choose a confidential facility, in which customers are not informed that their invoices have been sold. As a result, businesses that use invoice financing have complete control over their customer relationships and the process for collecting customer payments.

2. Flexibility

Businesses can sell their outstanding invoices whenever they need to. There are no lock-in contracts or minimum drawdown requirements. Based on the risk and terms of the transaction, each invoice financing transaction has its own discounting rates and processing fees (which are fully transparent if you use InvoiceInterchange’s services). This gives businesses complete control over when they want to obtain financing, the terms, and the price. As a result, invoice financing is extremely popular among SMEs.

3. Speed

Getting a conventional loan. There is a lot of paperwork to fill out, and approval can take a long time. After an invoice is loaded into the system, invoice financing can provide a cash advance in as little as one day.

4. Significant Drawdown

Invoice financing typically provides a greater drawdown than more traditional financing options such as an overdraft, credit card loan, or bank loan. The drawdown is determined by the revenue of each business. The facility limits will be adjusted as the business grows.

5. Simpleness of Use

Invoice financing is one of the most straightforward ways for businesses, particularly small businesses, to improve their cash flow. It is as simple as uploading an invoice and waiting for an investor to purchase it to gain access to funds through invoice financing. Funds can be advanced in as little as four hours after the trade closes.

The Drawbacks of Invoice Financing

There are two major drawbacks to invoice financing that may make it unsuitable for your company:

  • Limitations on invoices
  • Costs

Here’s a rundown of each disadvantage.

1. Limitations on Invoices

Invoice financing is fairly flexible, but it carries some risk for the finance provider because there is a chance that a debtor will never pay its outstanding invoice. As a result, most finance providers will only make advances on invoices issued to creditworthy businesses, which are typically larger businesses. If your company only sends invoices to small businesses, you won’t be able to use invoice financing.

2. Costs

All finance providers will charge a fee in exchange for providing invoice financing services. This is usually a percentage of the invoice’s total value. This means that if you choose invoice financing, you will have access to your funds sooner, but at a cost.

Some companies can offset this by passing on the cost to their customers. Businesses that receive a discount for paying their bills on time are in a great position because they can use the earlier access to cash tied up in their invoices to pay their bills on time, and the discount from their supplier often compensates for, if not outweighs, the cost of using invoice financing.

Is Invoice Financing a Good Fit for Your Company?

Only you can decide whether invoice financing is the best cash flow solution for your company, and you may want to consult with a qualified financial advisor before deciding to use invoice financing. However, if your company has at least one large customer or client and some of your suppliers offer discounts for early bill payment, invoice financing could be a great option for you.

Credit Terms Make it Difficult for SMEs to Manage Their Cash Flow

While credit terms can encourage prospects to make their first purchase from you and existing clients/customers to make repeat purchases, a debtor’s ability to pay their outstanding invoice at a later date means you must wait weeks or even months for incoming payments. The fluctuating waiting periods and uncertainty about when you’ll be paid can cause cash flow issues and anxiety.

So, what can you do if your bills are due but you haven’t paid your invoices? Simply sell your invoices for an immediate and simple cash flow solution.

Selling Invoices Provides a Quick and Simple Cash Flow Solution

When you sell an outstanding invoice to a third party, they assume the risk of the credit you’ve extended. At the same time, you gain access to the funds required to cover your expenses. The fee is a small price to pay to relieve your anxiety. In today’s environment, selling invoices to banks and traditional factoring companies can be difficult PPC. Alternative finance providers, however, such as the invoice discounting company Invoice Interchange, provide quick and easy invoice trading with no lock-in contracts and fully transparent fees.

Should You Sell Your Bill?

Alternative finance, like many new services, carries some stigma because it is a new way of doing things. However, Australia’s alternative finance scene is vibrant and expanding. Invoice finance is a useful solution for many businesses from Sydney to Melbourne to Brisbane and everywhere in between, so contact us today to see if it’s right for you.