You have options when it comes to how you may want to collect or cash out on invoices that are owed to you and your business. Both can be simple to deploy and help out your business cash flow than other options. There is some inherent risk with either option when considering factoring vs invoice financing, so do be aware of this ahead of time. They can also be quite costly due to what your business may lose out on each invoice, regardless of invoice factoring vs invoice financing. If you’re looking to explore further after understanding the differences, feel free to come to us at directroute.co.uk.
A closer look at invoice financing
Here you’re looking to utilise your invoices as collateral to obtain funds for your small to medium size business. All outstanding invoices can be factored into the calculation of the loan, even an overdue invoice, and the amount can be up to 90% of the total amount of invoices left unpaid.
You can still retain complete control of the sales ledger and collection process, so there are no third parties involved. That also means maintaining a better relationship with your customers.It will also give you better flexibility over which unpaid invoice you want to use as part of the financing and you can adjust how much additional funds you will need.
Invoicing financing is a relatively quick and simple process and you can easily receive funding within just a couple of days at the most which helps to alleviate any cash flow issues that may have arisen. Confidence is one of the key benefits as well, as there’s no need to have to disclose to your customers that you’ve actually done invoice financing at any point.
Looking at some of the cons of invoice financing
On the other side of the spectrum a significant cost is associated with invoice financing. Not only are you not getting the full value of your invoices in the initial funding but you also have to pay interest or fees consistently for the borrowed amount. This can eventually start to affect your cashflow that you were working to stabilise in the first place.
You’re also still fully responsible for the collection of the outstanding invoice used for the loan, and that can be a time-consuming issue that may never get resolved. This is the risk that comes with invoice financing, where you’re still responsible for paying back the loan but may not collect your payments from the invoices.
A final area to consider is that it may not be as readily available to all business types, such as those in high-risk business operations or those that may not have an extensive business track record.
Looking at Invoice factoring as an option
Now we’ll look at the other option in the debate between invoice financing vs invoice factoring. This works because you end up selling your outstanding invoices to a third party at a reduced value of the total invoices offered. This could still be quite high and even up to 80% of the value of all of them. This also means that you’re not responsible for chasing customers to pay those invoices, and it gets handed over to a third party for collection form.
Some of these businesses that provide invoice factoring services will also offer credit protection, meaning even if an overdue invoice isn’t paid ever, it won’t reflect back on the small business in any way who sold it, nor do they need to pay anything for it. This can be a great way to grow your business and simply get the much-needed cash for expansion sooner, without any of the hassles of going after each outstanding invoice.
There are some negatives to consider as well
It’s important to note that your business will be selling off the invoices when you do factoring vs invoice financing. That means you lose complete control over the sales ledger and the collections aspect. This can be harmful to the company’s reputation, especially with recurring customers.
There’s also no confidentiality that can occur with factoring, meaning that your customers will know that the invoices were sold off and they are now dealing with a third party to handle the repayment.
There are costs that can easily add up beyond the discount charges that occur based on the overall value of the invoices in the factoring. There are also fees to consider, and usually, factoring costs could be higher than invoice financing in many cases.
Again, not every business will be eligible, either. Most businesses that can use this service will need to hit certain minimums when it comes to invoices, invoice amounts, and overall turnover.
Do keep in mind everything above when it comes to your decision-making and which route you will take.
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