As a small business owner, positive cash flow is obviously critical to your success. However, waiting 30, 60, or even 90 days for payment can result in negative cash flow if supplier invoices are due before customer invoices are. Salt Lake factoring company Thales Financial suggests that invoice finance could be an ideal solution for some businesses. Invoice financing allows companies to receive payment for outstanding invoices before these are due for payment.

Nevertheless, is invoice financing right for your business? This article will examine the advantages and disadvantages of invoice financing and hopefully help you to make an informed decision about whether it is a good fit for your business.

What Invoice Financing Is and How it Works

Invoice financing is a financing option that allows businesses to sell their outstanding invoices to a third-party lender, known as a factor or factoring company. The factor advances a percentage of the invoice value to the business, typically between 70% and 90%. They will also charge a fee, generally between 1% and 5% of the invoice value. The business will receive the remaining amount (minus the fee) when the customer pays the invoice.

For example, if your business has outstanding invoices worth $100,000 and you want to receive payment now rather than waiting for the customer to pay based on your terms, you could sell those invoices to a factor. They will then advance you 80% of the invoice value, or $80,000. The factor gives you the remaining 20% when the customer pays the invoice, minus their fee.

The Pros of Invoice Financing

One obvious but significant advantage of invoice financing is quick access to cash. Unlike traditional bank loans, which can take weeks or months to secure, invoice financing can often be arranged in as little as a day. This is especially beneficial for small businesses that need to cover payroll, rent, or other expenses.

Invoice financing can also improve cash flow by providing businesses with a more predictable payment schedule. Rather than waiting for customers to pay on their own timeline, a business can use invoice financing to get paid immediately and consistently. This makes it easier to plan and budget for future expenses.

The Cons of Invoice Financing

Although invoice financing can be a valuable tool for small businesses, it does come with some drawbacks. One significant disadvantage is the cost. As mentioned above, factors typically charge a fee of 1% to 5% of the invoice value, depending on the length of the payment term and the creditworthiness of the customer. This can add up quickly, especially for businesses with a large volume of invoices. Furthermore, there may be additional fees if the customer does not pay on time.

Another potential downside is that it may harm customer relationships. Customers may mistakenly view invoice financing as a sign that the business is financially struggling or has poor credit. They may also be confused by the fact that they are paying a third-party lender instead of the entity they conducted business with. To avoid these issues, it is important to be transparent with your customers about their use of invoice financing.

Conclusion

Whether invoice financing is suitable for your business or not depends on a few factors, including the size of your business, the volume of your invoices, the creditworthiness of your customers, and the cost of the financing. By carefully considering the advantages and disadvantages and conducting research, you can make an informed decision about whether invoice financing is right for your business.

If you do decide to pursue invoice financing, it is important to choose a reputable and trustworthy factor that has experience working with small businesses.