What are the advantages and disadvantages?

Whether your business is finding its feet or already an established player in your industry, cash flow management remains an ongoing challenge. This is doubly true for companies that invoice other companies.

If you find yourself looking for unpaid bills more often than you would like, bill financing offers a potential solution. Below, we explore some of the pros and cons businesses should be aware of if considering invoice financing.

Benefits of Invoice Financing

Generally, some of the main benefits of using invoice financing are:

  • Secured against your bills
  • The facility grows with your business

Secured against your bills

Traditional business loans often require some form of collateral, and if you opt for an unsecured loan you may find that they tend to attract higher interest rates. Newer companies and those with limited assets might not find either option suitable.

Invoice financing, on the other hand, is secured by the value of customers’ unpaid invoices. In addition to removing some of the barriers to accessing finance, it also makes it less risky for the borrower, as the funds are already due to them.

“Using your receivables as collateral, you can quickly access valuable cash without having to pledge goods or equipment and keep your balance sheet intact,” said Joe Donnachie, supply chain finance manager. at Octet.

Cash flow improvement

Unlocking money tied up in unpaid invoices means your business gets paid immediately, rather than waiting over a month for customers to pay.

Donnachie explains that growing receivables can become a source of concern for many business owners, especially if they are accumulated enough that the business is at risk of a dreaded cash flow crisis.

“With an invoice financing facility, however, you can turn that asset into readily available cash and keep your business on track for high growth,” he said.

The facility grows with your business

Unlike a business loan, which offers a specific amount to be repaid over a set period of time, the amount of financing available through invoice financing increases as your business generates more invoices.

Founder and CEO of Timelio, Charlotte Petris explains that this flexibility can work well for companies going through a phase of strong growth or experiencing seasonality in demand.

“For these businesses, it can be difficult to accurately forecast cash flow needs and having a financing mechanism that is flexible and that scales with the demands of the business is critical,” she said.

Disadvantages of Invoice Financing

Some of the disadvantages you might encounter when using invoice financing include:

  • Installation may be leaked
  • Less funding during low seasons

Installation may be leaked

Some forms of invoice financing involve the sale of your accounts receivable ledger to a third party, who will then assume responsibility for continuing payments. This can create problems for business owners who want to keep their financing needs private.

If you have any questions about privacy, be sure to speak with your lender before signing up. Although customers are required to pay bills directly to a lender’s bank account, you may be able to arrange for this to be done confidentially.

Less funding during low seasons

Of course, the flip side of having a facility that grows with your business is that funding can dry up during slower times. While additional cash may not be needed to cover day-to-day operations, it can be a problem if you rely on invoice financing to grow your business.

Who is Invoice Financing for?

If your business has other businesses as customers, offers long payment terms, and does not have immediately available collateral, it could benefit from using invoice financing.

“There are many types of industries that depend on invoice financing, for example, manufacturing, professional services, construction, labor leasing, wholesale, recruiting are just a few- ones,” Petris said.

“Because the invoice or receivable is used as collateral for financing, it is a popular choice for service companies that do not have significant assets or plant and equipment on their balance sheet to use as guarantee.”

For more information, see our guide to financing small business invoices.

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