Invoice factoring / invoice financing is a quick and short-term borrowing for companies to improve their cash flow. For effective use of invoice factoring, businesses need to be aware of the benefits and draw backs.
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Benefits of Invoice Factoring / Invoice Financing
A confidential transaction can be arranged to allow businesses to opt into invoice factoring in confidence. Their customers will not be informed of the financial arrangement. This gives businesses total control in terms of customer relationship and collections process.
2. Flexible rates:
Discounting rates and processing fees are tailored to each transaction depending on the risks and terms, giving businesses full control on when they want to obtain financing, how long and at what price. This feature is one of the reasons why invoice factoring/financing is so popular among SMEs.
3. Fast and quick working capital injection:
Cash advance by invoice trading platform are usually transferred within 1 day. This is comparatively much faster than other credit facility which offers by traditional banks which might take up to several weeks. With the main objective of easing up cash flow, this feature supports smooth operations for businesses as they can now draw down as and when they need to.
4. Higher draw down:
Compared to the traditional overdraft, credit card, or even bank loan, invoice financing usually offers a higher draw down amount. The available draw down scales according to the company’s growth. As the company issues more invoices, credit limit will be adjusted accordingly.
5. Ease of cash flow
Utilising invoice factoring/ invoice financing improves cash flow for SMEs, help support their growth potential. Many SMEs are limited by their tight financial budget which restricts SMEs from taking on new projects. With invoice factoring, businesses are able to unlock working capital that are tied up in the receivables to purchase more inventory to take on more order or new contract.
Draw Backs of Invoice Factoring / Invoice Financing
1. Only accepts invoices which are issued to large customers
Generally, financier only accepts invoices that are issued to creditworthy entities. Businesses who issues invoices to SMEs are usually not suitable for invoice factoring facility.
For invoices that are financed, there will be a shave off in terms of profit margin. It is advisable for businesses to consider these costs. Some businesses pass on the costs to their customers or use the early payment to pay off supplier earlier with a discount.