The Pros and Cons of Invoice Factoring
by Curt Queyrouze
Invoice factoring is a powerful tool that businesses can use to help stabilize their cash flow and address a variety of financial needs. Invoice factoring ultimately leads to a company having quick, dependable access to funding, the single most important reason for its widespread use and popularity among a variety of business across the modern economy. However, it’s vital that business owners and other financial decision-makers understand what sets invoice factoring apart from other business loans and similar forms of working capital provided by financial institutions. Company leaders must also learn about the best situations in which to use factoring, in addition to the specifics of this type of lending.
With these needs in mind, let’s explore the concept of invoice factoring as well as its pros and cons.
What is invoice factoring?
In basic terms, invoice factoring takes the accounts receivable invoices your company generates on a regular basis and gives them to a financial institution in exchange for immediate payment to your enterprise through a line of credit. The bank then handles the payment of the invoice from the company that originally incurred the debt. Essentially, the financial institution you partner with uses the invoices as collateral for a line of credit, providing steady and immediate cash flow instead of the delays often seen in a variety of industries.
The biggest benefit of invoice factoring to business owners is eliminating the lag that regularly occurs in the business-to-business world when a client owes a debt to a vendor. Whether bills are commonly settled two weeks or two months after they’re received in your industry, the waiting period between sale and payment can hold companies like yours back and disrupt a steady cash flow that is so crucial for continued development and success. By partnering with a financial institution to secure this type of bank loan secured by a readily available form of collateral – unpaid invoices – you can change the way your business operates for the better.
With the overall concept of factoring in mind, let’s look at the pros and cons of using it. With this info, you can help your business make the most effective decisions for its unique situation and effectively address future goals.
The pros of invoice factoring
This form of financing has a lot to offer organizations, from the terms offered by trusted financial institutions like TAB Bank to the ultimate results. Benefits of invoice factoring include:
- Stabilizing cash flow by removing payment delays from the equation. This is beneficial in the short term when companies face a cash flow crunch, as well as in the long term for enterprises with a strong seasonal component or generally uneven sales. A more regular stream of funds into a business is a major advantage in a wide variety of contexts.
- Leveraging an existing asset instead of using real estate, machinery or other valuable business resources. Your organization doesn’t have to worry about how to pay back the loan – your financial institution handles the duties of collecting on the unpaid invoices you use as collateral.
- Offering a continued source of reliable income. An invoice factoring agreement can continue as long as your organization finds it helpful and worthwhile. It’s not a static loan that offers a one-time payout; it’s a continuing, mutually beneficial relationship between two businesses.
The cons of invoice factoring
Although invoice factoring is a versatile and powerful tool, there are some important considerations to keep in mind:
- Although costs from reputable financial institutions like TAB Bank are modest, invoice factoring requires you to pay your provider for the service.
- The creditworthiness of your clients is a factor. If they regularly have trouble paying bills, your invoice factoring partner may provide a smaller cash advance or otherwise discourage future interactions.
- You need a high degree of confidence your clients will ultimately pay their invoice. Otherwise, you may ultimately have to collect yourself – and be on the hook for additional costs.
Making an important choice
If your company’s bank account requires an influx of funds, invoice factoring – also known as accounts receivable financing – helps both large and small businesses stabilize cash flow and continue to work toward success. For reasonable payment terms, a culture of understanding your operations and a focus on a personal touch for all clients, consider a factoring company like TAB Bank as you move to address your needs.