Pros of Invoice Financing
Like other financing options, invoice financing has its set of pros and cons. First, let’s discuss the pros of invoice financing:
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01 High Rate of Approval
Bill finance companies are more interested in clients’ credit and financial backgrounds than borrowers. Before approval, the lender will conduct a background check on the client and then decide whether to approve the financing. By checking customer backgrounds, finance companies can better understand the risks they take. So if your main concern when making a loan is the poor credit rating or poor financial condition of your business, invoice factoring may be a viable financing option. As long as your client’s financial condition is stable and payment records are perfect, you have a higher chance of getting financing approved.
02 Immediate Funding
Companies applying for traditional loans will have to wait weeks or even months before they can be approved. There is even no guarantee that they will eventually get a loan. However, with invoice financing, you can get approval within a few days. Some alternative lenders can even approve your loan after 24 hours and transfer the funds immediately. This is a suitable financing option for companies that want to invest in urgent business opportunities or companies that want to meet their monthly accounts payable.
03 No Need to Chase Customers for Payments
Chasing and collecting money is one of the most challenging tasks for all businesses. You don’t want to be enthusiastic about your customers by pestering them to pay. Invoice financing companies may be exempted from this responsibility. You can use invoice factoring to get the cash you need, while letting the factoring company handle the collection. After you remove the gathering job from your to-do list, you can use the extra time to deal with more pressing business matters. It can be strategic planning, accounting, or attracting more clients.
Cons of Invoice Financing
01 Higher Costs
The convenience of bill financing also comes with high costs. Finance companies typically charge a service fee of 1-5% of the total amount of financed invoices. For some companies, this can be a huge disadvantage. Before deciding to use invoice factoring, consider whether the benefits of financing will allow your business to overcome the drawbacks.
02 Approval is Dependent on the Customer’s Credibility
Similarly, the billing company decides to approve based on the customer’s creditworthiness. If the loan company discovers that your client’s credit and payment history is in question, it can affect your chances of approval.
Based on the agreement reached between you and the finance company, if the unpaid customer invoice is not paid within the specified time, such as what happened during the recourse factoring period, you may be liable for it. In this case, you will have to buy back the invoice. If you have difficulties, it can put an additional burden on your finances.
If you encounter cash flow problems due to unpaid bills, bill financing is definitely a practical financing option to consider. you will definitely find the most suitable invoice financing option for your business. Despite some drawbacks, invoice financing can provide you with the fast cash you need, so you don’t have to deal with missed payments and growth opportunities again. As long as you have reliable customers, you can use this financing plan to help your business succeed.