Understanding-the-Advantages-and-Disadvantages-of-Invoice-Factoring

The pros and cons of an invoice finance facility for your business

Invoice factoring proves to be an effective and dependable method for generating consistent working capital. It alleviates the burden of timely bill payments, providing the opportunity to strategise for enduring expansion. 

The pros and cons of factoring differ based on your business type. However, a notable universal shift is the routine cash advances from your lender. These amounts are determined by the invoices you dispatch, typically ranging from 80% to 90% of each approved invoice.

 

Advantages of invoice factoring

I. Planning for growth

Numerous small businesses encounter challenges in securing ‘traditional’ bank loans. However, the features of invoice factoring reduce the risks, benefiting both the bank and the borrower.

Expansion opportunities arise on various fronts:

  • Enhanced marketing budget
  • Ability to acquire additional capital assets
  • Assurance of meeting liabilities
  • Employment of extra staff to meet demand

 

If your business is prepared, invoice factoring stands out as one of the safest means to fund growth without jeopardising an already positive cash flow situation.

II. More time to focus on the business

Invoice factoring entails relinquishing control of your credit procedures to the lender. This comes with numerous advantages, notably the additional time you gain to manage the company.

Concentrating on the broader perspective rather than handling the details of daily operations is inherently motivating and can instigate positive transformations throughout the business. 

The responsibility of pursuing payments rests with your lender, enabling you to channel your efforts where they are most valuable:

  • Enhancing customer service
  • Engaging in tasks that drive sales
  • Strategic planning

 

III. No limit on available borrowing

The extent of your borrowing is linked solely to the quantity of approved invoices dispatched. This means you are not reliant on lengthy credit checking processes and burdensome paperwork to secure additional funding when required.

IV. Fast access to cash

Typically, funds are advanced within 24 hours of sending an invoice. This swift access allows for cost-effective business operations. When contrasted with the usual 30 or 60-day gap between invoice dispatch and money receipt.

 It becomes evident how enhanced flexibility is provided for your own payments:

  • Early payment discounts may be offered by your suppliers, sometimes offsetting your lender’s fees.
  • Ensuring staff salaries and other routine bills are settled throughout the month.
  • Addressing long-term liabilities.

 

V. Factoring negates the need for other types of funding

Utilising the worth in your sales ledger ensures that capital assets remain untouched. While other types of asset-based lending prove helpful, invoice finance is adaptable, offering financial access without the peril of overwhelming debt.

Given the numerous factoring companies now providing this service, you have an abundance of options among providers.

VI. Low risk for both parties

Invoice factoring poses low risks for both parties involved. There’s no requirement for personal guarantees or collateral, and as lending is tied to completed work, the lender’s risk is minimised. The factoring company is responsible for payment collection, often with robust and efficient procedures in place.

Despite the numerous advantages of factoring, it’s crucial not to overlook potential drawbacks. Like any form of lending, invoice finance may not be suitable for every business.

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Disadvantages of invoice factoring

I. Complex exit process

Exiting a factoring agreement can prove challenging because of the abrupt decrease in cash inflow. While this requires careful handling, it is not an insurmountable issue. Moreover, certain lenders may demand a lengthy notice period for agreement termination.

II. Fees, costs and other terms

Understanding the terms offered in a factoring agreement is crucial, along with a clear idea of your business requirements. If the fees and charges appear elevated, it’s vital to consider the potential for long-term growth rather than focusing solely on the short-term scenario.

III. Customer service 

If maintaining strong customer relationships is a hallmark of your business, opting for invoice factoring might harm your company’s image. Customers may object to entrusting their debts to a third party.

IV. Operational changes

Some agreements may lead to alterations in the way a business operates. This could occur if a few customers lack sufficient creditworthiness or if opportunities within the market are not fully maximised.

On the whole, the benefits of factoring seem to surpass the drawbacks, but the efficiency of your sales ledger processes and your turnover level are crucial factors.

We can assist in determining if this form of finance suits your business. Vanguard Insolvency maintains enduring relationships with various lenders and can provide advice on invoice factoring terms, conditions, fees, and costs.

Senior Partner at Vanguard Insolvency Practitioners | Website | + posts

I am an insolvency professional with a distinguished career specialising in commercial insolvency, adeptly navigating Creditors Voluntary Liquidation, Company Voluntary Arrangements, and Company Administrations. With a comprehensive understanding of insolvency laws and an unwavering commitment to ethical practices.