Cash management is typically a determining factor in corporate success. Growing enterprises in any industry that trades on credit terms encounter difficulty in maintaining strong cash flow. Having enough income stream to sustain operations is one of the most important aspects in determining whether a company can continue to develop and fulfill orders. Cashflow can be boosted by either invoice factoring or invoice financing as described below.
Invoice factoring is a sort of invoice financing in which you “sell” some or all of your outstanding invoices to a third party to improve your cash flow and revenue stability. A factoring business will pay you the majority of the invoiced amount right away and collect payment from your customers directly. We’ll go through the positives and downsides of invoice factoring in this article.
Factoring of invoices is also known as accounts receivable factoring or debt factoring.
Invoice factoring is the process of selling part or all of your accounts receivable.
It works like this: You supply your consumers with conventional items or services. A factoring company “buys” the raised invoices from you and processes them into a factoring service. The factoring provider is paid directly by your consumers, who then choose how much they want to pay for them.
When your firm has a lot of overdue bills and your cash flow is hurting, you might consider invoice factoring.
Factoring has several advantages.
Enhanced and stable cash flow – invoice factoring allows you to have your invoices paid instantly rather than waiting for payment. It allows you to be more precise in your business planning and forecasts, as well as take advantage of opportunities that would otherwise be out of reach.
Better cash flow increases the chances of your company surviving. Many businesses fail due to insufficient cash flow, and invoice factoring can help you keep yours healthy if you use it correctly.
Invoice factoring is typically less expensive and easier to secure than a bank loan, making it ideal for short-term financing needs. It also relieves you of the burden of debt management. That might be significant savings, depending on the size of your consumer base.
Reduces business overheads—Using invoice factoring services may help you save money. While invoice factoring has costs, they may be less than the cost of hiring professional credit control personnel. Because chasing payments is typically a difficult job, invoice factoring may improve the attitude of your accounts department employees.
Some disadvantages can such as
Invoice factoring isn’t suitable for companies with only a handful of main customers. Factoring companies prefer to spread their risk as widely as possible, it costs more when your customers are risky or when it does not work
Can affect your client connections – When you factor bills and the factoring business handles credit control, you’re also handing away some control over your customer relationships. If the factoring company pursues the debt in an unfriendly or aggressive manner, you risk alienating your clients and losing future business. They can interpret your use of a factoring company as a sign that your business isn’t doing well.
Invoice finance is a type of short-term financing in which your company borrows money against the amount owed on invoices it has sent to clients. The trade receivables are subsequently put up as security.
Construction, retail, logistics, printing and publishing, transportation, and consumer products are just a few of the businesses that use invoice finance.
If a large portion of your company’s assets are locked up in receivables, and those receivables make up a large percentage of your current assets (possibly due to excessively long payment terms), invoice finance may be able to help you avoid working capital problems. This makes invoice financing a viable alternative for small firms.
How invoice financing works
When you give your consumers the goods/services and instantly bill them, you give the invoice finance company the invoice details (the lender). Within 48 hours, you should get a portion of the invoice’s face value (the percentage is determined by the lender’s risk standards). When your clients pay you, you settle your account by repaying the lender and keeping the portion that was not covered by your invoice financing agreement.
Acquire Money Quickly Without Taking out A Loan
Traditional loans, on the other hand, are debts that must be carried on the balance sheet and serviced with monthly interest payments. Invoice financing works differently since it allows a company to get money from its creditors faster. This sort of financing does not necessitate long-term commitments.
Lessen the chance of missed payments and debts
Customers’ late payments and bad debts can bankrupt a company. Of course, you can sue debtors who don’t pay their bills on time or refuse to pay, but this can be costly and time-consuming because you’ll need to employ and retain a lawyer to represent your firm. To avoid a situation like this, invoice discounting can help. The invoice finance company does an independent credit check on your debtor and frequently purchases non-payment insurance. Such businesses employ professionals who understand how to deal with consumers who are likely to pay late or not at all, as well as how to recover money.
You can choose how much money you’ll need and how often you’ll need it.
When employing invoice finance providers, businesses can pick how much cash they need. They can maintain complete control of their finances and only access the funds they require when they desire it. In addition, because invoice financing is often paid back in a month or two (when the debtor pays), rather than a year or more later, businesses can use the funds repeatedly, similar to a revolving line of credit.
Cons of invoice financing include:
It may be more expensive than standard financing (e.g. bank loans). Some invoice finance firms impose astronomical fees. You should be informed of the charge structure so that you receive the most of your funds.
Invoice finance only helps you with your financial flow. Other issues in your firm will still exist; the difference is that you may have more money in the bank to address them.
Invoice financing businesses may contact your clients directly, requiring you to inform them that your bills have been financed. While invoice finance had a bad reputation in the past, the reality is that the majority of firms use it at some point when they need cash.
What is the difference between invoice factoring and invoice financing?
Invoice factoring is a contract between you and a third-party entity (the “factor”) to buy your accounts receivables for a fraction of their face value (typically 70 percent to 90 percent of the total).
Unlike invoice finance, these contracts frequently include services like invoicing and debt collection. Factoring invoices can help you save money.
Credit risk because it doesn’t require you to put up collateral, but it does mean you lose control of your client relationship because the factor will collect the money from your customer, not you.
Now that you know what these two are, how they work, and their benefits and drawbacks, you can make an informed decision based on your financial situation, the stability of the company, and, most importantly, how quickly you require financial aid.