What Are The Risks Of Invoice Financing?

What Are The Risks Of Invoice Financing?

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ABC FinanceInvoice financeWhat Are The Risks Of Invoice Financing
Gary Hemming

Author: Gary Hemming CeMAP CeFA CeFA CSP

20+ years experience in invoice finance

When looking to take out any finance product for your company, it’s important that you understand the risks associated with it as well as the potential benefits.

While there can be a tendency to focus on the problem that is being solved, you should take time to look at the bigger picture.

In this guide, we break down some of the risks associated with invoice financing.

Becoming over reliant on the cash flow boost provided

If your business becomes over reliant on the increased working capital provided by an invoice finance facility, you leave yourself slightly exposed.

This is true of leaving yourself with no room to manoeuvre in any part of your business operations.

An over reliance on the increased working capital can leave you unable to find the funds needed for business operations should something change. For example, if a customer faces sudden financial difficulty, they may lose their credit rating and become unfactorable, meaning that you can no longer fund against their invoices.

This can happen whether you’re using an invoice factoring or invoice discounting facility.

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Impacted customer relationships

When you’re using debt factoring, the funder will manage your sales ledger and take responsibility for chasing unpaid invoices.

Should a customer fail to pay on time, the funder will chase them heavily to make sure they pay. If they fail to respond, the factor may choose to take action, impacting your customer relationship in the process.

Of course, when using a confidential invoice discounting facility, you retain control of your own credit control, and therefore remove this risk.

Some hybrid facilities also allow you to manage your own credit control, including CHOCS and CHOCC.

Read more – How To Use Invoice Finance As A Business Contingency Fund.

Clawed back cash from defaulting customers

If a customer was to default, failing to pay their invoice, your funder will look to recoup the funds from you.

This can impact your cash flow as you begin to issue invoices and no further funds are released as the debt is cleared.

This can be offset by choosing to take bad debt protection, also known as credit protection from your provider. While not every funder offers this service, many do and it means that if a customer fails to pay, your insurance policy will pay out and clear the invoice.

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Choosing a provider with poor service

Not all invoice finance providers are equal. Like every sector, some offer an excellent customer focussed service and others don’t.

A good invoice finance broker can help you sort the better lenders from those with patchy service, so consider working with one.

Alternatively, you could look at online reviews and speak to others who deal with a provider to try to understand how strong their customer experience is.

Other issues to consider include hidden fees, unclear pricing structures and slow service.

How to mitigate these risks

As mentioned above, the two best ways to mitigate these risks are to do plenty of research before working with a lender and using a reputable broker. A broker will be able to guide you based on your needs and help you to find the most appropriate funder for your needs.

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