What are the advantages and disadvantages of invoice financing? Factoring financing has been gaining popularity as a way to finance a growing business. If you are not familiar with this type of financing, you can learn about it in detail by reading, “What is factoring?” Factoring is essentially a financial tool that allows you to finance your slow-paying invoices from creditworthy customers. Using your invoices as collateral, the finance company advances funds to your company – providing you the resources to pay important expenses.
However, like any business financing solution, factoring has both advantages and disadvantages. This article explains these advantages and disadvantages so that you can make an informed decision as to whether factoring is the right solution for your company.
Advantages of Factoring
Factoring has the following advantages:
Improved cash flow:
The most important advantage of factoring your invoices is that your cash flow improves – putting you in a better position to cover company expenses.
Extend payment terms with confidence:
You can extend 30- to 60-day payment terms to customers confidently because you do not need to wait that long to get funds out of your invoices.
Easy qualification requirements:
Unlike other business financing solutions, factoring is relatively easy to qualify for. Most companies that have solid customers and do NOT have major problems should qualify.
The factoring line can be deployed quickly – usually in a week or two – allowing you to respond quickly if your company is in a crunch.
Since the line is based on your invoices (their dollar amount and quality), the line can grow and adapt to increasing revenues. This important advantage provides a financial platform that can support growth.
Invoice financing has a simpler application process that most other solutions.
Disadvantages of Factoring
However, invoice financing is not perfect for every company. Factoring has some disadvantages that you should be aware of so that you can make an informed decision. Some disadvantages include:
The cost of factoring financing is much higher than the cost of other types of funding.
Solves a very specific problem:
Factoring is designed specifically to address the cash flow problems created by slow-paying customers. If you have other problems, or if you need capital to buy equipment, factoring offers little (if any) help.
Your customers will know:
Your customers will know that you are using this type of financing. They receive a Notice of Assignment advising them of your factoring relationship.
Your invoices will be verified:
Most factoring companies verify your invoices with your customers to ensure that they are accurate and that your customers are satisfied with the products/services.
This article does not provide an exhaustive list of advantages and disadvantages of factoring invoices. However, it should help you determine whether factoring is the right solution for your company.
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Advantages and Disadvantages of Invoice Financing
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