There are many benefits to invoice finance, but we take a look at some of the drawbacks.
- It solves a very specific problem
Invoice financing was created to solve the issue of insufficient cash flow. This type of financing may not be useful if your clients pay your bills on time and within appropriate payment periods. Other types of financing may be more suited if you need money to acquire new machinery or equipment.
2. Customers may be aware that an agreement has been reached
It’s possible that your consumers are aware that you have an invoice financing service in place. Whether you pick a factoring or invoice discounting agreement will determine this. Customers’ payments will be collected by factoring suppliers, who will deal directly with them. This might jeopardize your connection with those consumers. Invoice discounting allows a company to keep control of payment collection while keeping the client unaware of the agreement.
3. Other businesses must be your clients
Invoice financing is only possible for commercial bills with a different company as the client. This type of financing is not accessible if you sell items or services to the general public.
4. Decreases profits
More drawbacks of invoice finance are that the interest and processing fees that come with any business loan are a potential disadvantage of invoice financing. In the near term, a company’s earnings on bills that have been financed may be decreased. The possibility of expansion and early access to capital, on the other hand, seem to outweigh this disadvantage.
5. Industry sentiment
Excessive invoice financing is frowned upon by some parties. Invoice finance, like any other company credit product, is a means to a goal rather than an end in itself. A wise company recognizes this and balances its borrowings while also improving internal credit controls.
6. Borrowings based only on commercial invoicing
Invoice financing is often given on business bills due to the unsecured nature of this kind of credit and the risk associated with the lender. This might be a disadvantage for businesses that deal with the general public and want to use invoice finance to generate money.
7. Volatile
More invoice finance drawbacks are that it only provides partial or full funding for current accounts receivables, thus it may not be sufficient if a company needs a certain quantity of money.
8. It may be more expensive than other kinds of funding
The cost of invoice financing has decreased in recent years as industry rivalry has increased. However, it may not be the most cost-effective option for you. Always acquire quotations from many invoice finance companies and compare the costs to alternative loan sources. All finance providers will charge a fee in exchange for offering invoice financing services. This is generally expressed as a percentage of the invoice’s total amount. This implies that if you employ invoice financing, you’ll obtain your money sooner, but at a cost. Some firms can offset this by passing the expense on to their consumers. Businesses who obtain a discount for paying their bills early are in a good position since they can utilize the earlier access to cash connected to their invoices to pay their bills earlier, and the discount from their supplier typically covers or even surpasses the cost of utilizing invoice financing.
9. Invoice limitations
Although invoice financing is very flexible, it does come with a level of risk for the loan provider, since there is a potential that a debtor would never pay an overdue invoice. As a result, most financing companies would only advance money against invoices issued by creditworthy companies, which are generally larger companies. You won’t be able to use invoice finance if your company exclusively sends invoices to small firms.
10. Credit may be difficult to come by for smaller businesses
Because invoice discounting is often only available to firms with a high volume of sales, one of the downsides of this type of financing is that smaller businesses may have a difficult time finding lenders who would accept them. There are usually some very severe ground rules in place, and the firm must be able to demonstrate a track record. While lenders are sprouting up to fill the void, some may demand a higher cost as a result of this.
11. Finding additional business finance could be difficult
Because accounts receivables are used as collateral in some kinds of business finance, the existence of an invoice discounting agreement in which the invoice becomes an asset of the finance firm rather than yourself may prevent you from obtaining more funding.
Is invoice finance a good fit for your company?
Only you can decide whether invoice financing is the best cash flow option for your company, and you might want to get guidance from a skilled financial adviser before deciding to utilize it. However, if your company has at least one major customer or client, and at least some of your suppliers provide incentives for paying your bills early, invoice financing might be a fantastic alternative for you.
To find out more about whether invoice finance will be beneficial for your business, you can contact the team at Funding Bay for a consultation.
