Invoice financing is a popular method of improving cashflow for many new and small businesses. Financing agencies help business owners improve their short and long-term cash flow. Rather than waiting for the consumer to pay, a company can sell their invoices to a professional financing group who will then receive the payment from the consumer. There are many pro’s and cons to working with the professional invoice factoring companies. If you own a business, you should look at both the pro’s and cons of financing your invoices to see if it is right for you.
Pro’s:
- As a business owner, you have an instant and steady cash flow so you do not have to wait for the money. With an improved stream of incoming funds, you can buy your supplies at reduced, bulk, or sale prices rather than paying full retail or higher costs.
- A steady stream of money means you can plan your next investment opportunity, business building venture or expansion project.
- A consistent flow of money coming into the business also means that you will have the means to always pay your staff and bills on time. This reduces the stress of trying to budget your money so you can focus on other parts of the business.
- Invoice financing can also help you get through seasonal fluctuations when business is slower and there is less money coming in.
- Financing agencies run credit checks on consumers and will inform you if someone has a poor credit history. You can be alerted to their rating before doing business with them and decide beforehand if you want to do business with someone. For an additional fee, some agencies offer debtor protection so you do not have to worry if the invoice does not get paid.
Cons:
- You will not receive the full invoice amount because you will have to pay a percentage of the invoice to the financing company as a fee for their service. The fee amount you pay will depend on the agency and amount owed on the invoice. This additional expense will cut into your profit margins.
- Some big corporations frown upon using invoice financing. If you are trying to form a partnership with another corporation, using a finance agency could interfere with your business plans. A partnering business that prefers traditional lending institutions might choose to wait until you secure funds with a bank before settling into a partnership.
- Selling your invoices to another company does not guarantee that the consumer will pay. If you do not have debtor protection and the consumer does not remit payment, you responsible or the amount owed to the financing agency. If you do not pay the invoice, a collection agency will be involved.
- Some companies become very dependant on invoice financing options so they never learn to manage their own finances. This could be damaging long term because money management is a significant part of running a business.
- You might be restricted in your business dealings. If the finance agency does not feel that someone is a good client, you could lose out on a great business transaction if they refuse or restrict your dealings with that consumer. Paper trails are important, but they do not always tell the whole story.
As a business, you lose communication with customers because the communication is transferred to the invoice financing agent. This will affect your relationship building and company growth.
Invoice financing has many benefits for business owners, but, like everything, it is not without its risks. Before jumping into any agreement, do your research, ask questions, have a plan, and talk to a consultant first to see if it is right for your company.