What Are The Risks Of Invoice Financing?

Conduct a cost-benefit analysis of invoice financing and you’ll find the positives greatly outweigh the negatives.

If you are on the fence as to whether invoice financing is worth it, give it a try, and you’ll likely be ecstatic with the outcome.

There is little downside to invoice financing. However, in the spirit of honesty, it must be noted that there are some risks to this unique form of business financing.

Whether you choose an invoice factoring or invoice discounting facility, we can help you secure the best deals in the UK.

The (Weak) Argument Against Invoice Financing

Let’s play devil’s advocate for a moment. Your customers aren’t paying promptly, and even those that do are on delayed payment terms of 30 days or longer.

Others are paying only part of the balances owed. Your business is in desperate need of cash.

Instead of wasting precious time and resources attempting to collect those balances, you turn to invoice financing or debt factoring. You receive 85% of balances owed up front to keep your business running like a well-oiled machine.

You can then simply sit back and let your lender handle the full credit control process, enabling you to get on with running your business.

Once invoices are settled, you receive the remaining 15%, minus the agreed cost of the facility.

The silver lining is that most invoice factoring agreements don’t end with the outcome described above.

Let’s take a look at other specific risks that deter some from doing business with invoice financing lenders.

Risk #1: Clients might view your business in a different light

Take the invoice financing route to notify clients that you sold their debt to a third-party invoice financing lender.

The outsourcing of credit control to a third party will alert your customer to the existence of the facility, but doesn’t tell them anything about your companies finances, so in reality the impact is minimal.

This can be largely mitigated by being proactive and letting your customers know about your decision to outsource credit control and frame it positively.

Mention the fact that you’re planning to grow the business and that the improved cashflow will help with that, or how improved cashflow or the time saving can positively impact your service levels.

Risk #2: Funds must be used positively

Using the funds raised from an invoice finance facility positively can increase your profits and provide a platform to grow your business.

Should you fail to use the funds profitably, you’re simply taking on an additional finance cost and could impact your profit margins.

This will lead to a cycle of reliance on the facility and provide nothing but a quick hit of cash flow that papers over the cracks.

It’s imperative that you consider the cashflow boost from a business planning point of view before you take on the facility.

This will allow you to make positive use of the funds, before you become reliant on them to fund your day to day business activities.

Risk #3: Your customers fail to pay

Should your customers fail to pay invoices that you’ve financed, then you will be required to repay the funds to your invoice finance provider.

This can be minimised by taking on bad debt protection, which passes liability for unpaid invoices from you to your lender.

While bad debt protection comes with a cost, it completely solves this issue, so if it is a point that concerns you, it is most likely a price worth paying.

Learn more about invoice financing today

Your business is a call away from potentially company-changing invoice financing.

If your accounts receivable are piling up or if you want to capitalise on sales instantly, contact us today to learn more about invoice financing.