Invoice Financing vs. Invoice Factoring
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What Is Invoice Financing?
Example of Invoice Financing
Pros and Cons of Invoice Financing
Keeps you in control With this type of financing, your company is still in charge of the collection process. That means you get to maintain your relationship with your customers and they don’t have any insights into your business’s finances. Smoother cash flow For companies that largely deal with other businesses, invoice financing can help alleviate cash flow issues due to unpaid invoices. Relatively easy to get Since your invoices serve as collateral for the cash advance, invoice financing can be easier to qualify for than other small business loans. Lenders are usually more concerned about your customer’s payment history than your (or your company’s) credit history. This means you may be able to qualify even if you have a limited or bad credit.
Can be costly While a fee of 1% to 5% may sound low, you need to keep in mind that this rate is often charged on the total invoice value per month and, in some cases, per week. Invoice financing companies may also charge fees, such as maintenance fees, invoice processing or advance fees, and early termination fees. Uncertain costs Although you retain control of collecting payments, you’re not in control of the total cost of invoice financing. Your business could end up paying a lot if a customer takes months to pay. Liability for unpaid invoices Your business may be responsible for repaying the borrowed funds in full if customers don’t pay their invoices.
What Is Invoice Factoring?
Example of Invoice Factoring
Pros and Cons of Invoice Factoring
Doesn’t require collateral Invoice factoring is considered unsecured financing. You usually sell the invoices to the factoring company, but you don’t need to worry about using other company assets to secure the loan. Smoother cash flow This type of financing can improve your company’s cash flow. Available with bad credit You could get approved even with bad credit.
Could jeopardize customer relationships You can’t control how the factoring company deals with your customers when it’s collecting invoices. Also, your customers will know you're having issues with cash flow. Can be expensive Compared to other types of small business loans, invoice factoring often costs more and is accompanied by additional fees. Liability for unpaid invoices Depending on the factoring is structured, you may be responsible for the borrowed funds if your customers don’t pay their invoices.
Invoice Financing vs. Factoring: What’s Right for You?
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