What Are The Pros And Cons Of Invoice Finance?

What Are The Pros And Cons Of Invoice Finance?

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ABC FinanceInvoice financePros And Cons Of Invoice Finance
Gary Hemming

Author: Gary Hemming CeMAP CeFA CeFA CSP

20+ years experience in invoice finance

Invoice finance is a crucial tool for many SMEs in the UK as it allows them to improve their business cash flow and relieve financial pressure.

While invoice financing is a great tool for many businesses, there are some key pros and cons to consider before you apply.

In this guide, we break down the key advantages, the drawbacks and what you should consider before you apply.

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What are the advantages of invoice finance?

The advantages of invoice financing are:

Improved cash flow

It improves your cash flow by allowing you to get access to most of the money due when an invoice is raised, rather than when it’s paid. For many companies, this means you’ll be getting the money between 30-90 days earlier than you would when waiting for payment from your customer.

Your facility will grow with your business

As your turnover increases, your invoice finance facility can increase with it. As your company expands, you will naturally require more money to support your business operations.

When you’ve got funding from a debt factoring funder, you can request an increase in your facility limit, which will enable you to release further funds quickly.

Read more – Invoice Finance: How Does It Work in the UK? or How To Use Invoice Finance As A Business Contingency Fund

It’s easy to manage

Most invoice finance lenders have simple online platforms that allow you to manage your facility online in minutes.

This makes it easy to understand exactly where you stand with your facility and spot any issues early, without having to wait for an annual statement as would be the case with a commercial mortgage or asset finance facility.

Freedom to negotiate with suppliers

As you’ll have much better cash flow due to receiving your money upfront, you’ll be in a position to negotiate improved terms from your suppliers for early payment.

When negotiating delayed payment terms with suppliers, you may be charged more for the goods or services that you’re buying.

Improved cash flow and the ability to make upfront payments can improve prices significantly.

Support with credit control

If you’ve taken an invoice factoring facility, you’ll get support with your credit control, as the lender will actually manage collections for you.

Your factoring provider will still release funds upfront, and then chase as needed to ensure things run smoothly.

The saved time in this area can give you a lot more freedom to focus on running your business.

If you choose to take invoice discounting, you will remain responsible for managing your own credit control. That can offer it’s own advantage however, as your facility will be confidential, and your customers will not know that you’re using finance.

Protection against your customers defaulting

Some providers can offer an added layer of protection beyond just offering support with credit control. This comes in the form of bad debt protection. When you take out bad debt protection, you are insured against your customer failing to pay their invoice. Should a customer fail to repay, the insurance would then pay out, meaning you don’t lose out as a result of them defaulting.

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What are the disadvantages?

The disadvantages of invoice finance are:

Impact on customer relationships

When you take out invoice factoring, you are handing over your credit control function to your financier.

This means that you’ll face a loss of control over your sales ledger and therefore, this part of the relationship between yourself and your customer is outside of your control.

While this can be mitigated by explaining to your customer, or by choosing a facility whereby you handle your own credit control – for example CHOCC, it should still be considered.

It costs money

No matter how good a deal you get – and we can get you the best deal in the market using our online invoice finance platform – it will still cost you money. You will still be expected to fees and interest, which may cause a small decrease in profitability if you can’t offset it through making savings as a result of your improved cash flow.

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