Last Updated on January 19, 2021
Invoice factoring can help business owners fill the gap between when an invoice is created and when the customer actually pays. It’s a way of obtaining cash to invest back into your company sooner rather than later, though you’ll want to be wary of extraneous fees and sneaky policies before sealing the deal.
What are the Advantages of Factoring?
Whether you’re a small business owner or manage a large operation, factoring invoices can be an asset for your B2B strategy. It offers benefits that other traditional lending options can’t provide, and is a more accessible solution for many businesses. To help break it down, here are some advantages of invoice factoring:
1) Quick cash for your business
Probably the most obvious reason why people turn to invoice factoring, it provides fast cash to keep processes running smoothly.
There are legitimate reasons why a business owner would need to get access to the fast cash, such as:
- Paying employees
- Settling monthly bills
- Bringing in fresh inventory
- Expanding to a new location
In general, keeping cash on hand means you can say “yes” to a new opportunity, instead of passing it up because you’re waiting for funds to come through.
2) Easier approval than a traditional loan
Getting a loan can be out-of-reach for businesses with limited collateral and a short financial history. However, invoice factoring companies pay most attention to the credit scores of your customers. That means a faulty or nonexistent track record won’t matter as much when you apply.
3) More flexibility for your clients
Increased cash flow for your company means you’re able to allow customers a little more leeway. Instead of requiring immediate payment, you can give them a month or more to complete the invoice, without worrying about the strain it’ll place on your own business.
4) Limited risk for you
Unlike a traditional loan, which requires collateral, invoice factoring is unsecured. So you won’t need to worry about valuable assets being seized if the customer fails to pay.
5) Helps manage overdrafts
Invoice factoring can help you meet the required minimum balances on your bank account and pay settle your businesses own dues so that you don’t have to risk defaulting on financial commitments
6) Highly accessible
After you initially set up an account with an invoice factoring company, you should be able to receive cash within hours of submitting an invoice. These days, you can usually manage the process entirely online.
What are the Disadvantages of Factoring?
That said, factoring isn’t always the best option for everyone. Be sure to weigh the potential drawbacks before determining what’s best for your business. Here are some of the potential disadvantages of invoice factoring:
1) There’s a stigma
While invoice factoring is, at its core, a business practice like any other, it has a bit of a shady past. Lenders have been known to take advantage of clients with confusing language and dodgy practices, though industry standards have since evolved for more transparent transactions.
2) Reduced profit margins
The factor company basically takes a cut out of each invoice. Even though it can be as low as 1-3%, you’re still losing a bit of income in the long run which may affect your company’s monthly budget.
3) Customers’ credit score could thwart financing
Though the pressure to have good credit is off your shoulders, a factoring company will need to verify your customers’ creditworthiness before taking the invoice. If the rating isn’t up to snuff, your invoice factoring request might be denied.
4) Collection isn’t guaranteed
Just because the factoring company buys the invoice doesn’t mean the customer is guaranteed to pay. In some cases, you might be required to settle the bill if the invoice isn’t cleared.
5) It’s a quick fix for only one problem
If customers are delaying payments and it’s messing with your business plan, it may indicate a more complex problem that needs a different strategy to stabilize things for the long-term.
6) Hidden costs and fees from shady providers
Not all factoring companies are the same, and some will try to take advantage of you. Application, processing, credit check, and late payment fees can add up – quickly. Even if you’re OK with the quoted factoring rate, be wary of additional costs and be sure to conduct thorough research before signing on. Make sure to read the fine print, and ask questions up front.
Like any business practice, invoice factoring comes with pros and cons. Carefully consider the why behind your choice. Will it help your company grow and expand? Are you planning on investing the money back into your merchandise or employees?
If your answer is yes, the advantages of factoring likely outweigh the disadvantages. If you’re interested in learning how it may work for you, request your free factoring quote from altLINE with basic information about your business. Find out why our customers trust us over the competition!
For more information, check out these helpful links to other valuable resources:
Photo by Russ Hendricks
Grey is the Director of Marketing for altLINE by The Southern Bank. With 10 years’ experience in digital marketing, content creation and small business operations, he helps businesses find the information they need to make informed decisions about invoice factoring and A/R financing.