Invoice finance (also known as accounts receivable finance) is relatively low risk for both the borrower and lender, as it’s based on money soon to come in. Both forms of accounts receivable financing are some of the fastest finance solutions on the market when it comes to financing, as you can typically receive an advance within 24-48 hours.
There are lots of advantages of invoice finance as a source of finance for your business. That said, as with all types of funding, there are also potential downsides. Take a look at the major pros and cons of each form of invoice finance below to assess further which solution is better for you.
Invoice Factoring (Pros)
- The finance company looks after your sales ledger, managing the credit control process and chasing payments, meaning you have more time and resources for other tasks
- They often have a comprehensive credit checking processes, enabling vetting of new customers
- Factoring companies can sometimes help you negotiate better terms with your suppliers
- Invoice factoring is open to smaller businesses, unlike discounting
Invoice Factoring (Cons)
- Your customers will be aware that you are using a finance company, which can damage valuable customer relationships, and in some cases cause them to look for services elsewhere
- Invoice factoring tends to be more expensive than invoice discounting, owing to the extra management they assume
- Invoice factoring agreements tend to be long-term, which can lose you profits in times you don’t truly need a financing facility
Invoice Discounting (Pros)
- An invoice discounting agreement is often confidential, protecting your customer relationships
- You maintain control over your credit control processes and debt collection, meaning you can continue to fully manage relationships with key clients
- Invoice discounting is usually cheaper than factoring as you maintain control over your sales ledger
- A discounting facility is usually more flexible with no long-term contracts, having the option of single invoice finance.
Invoice Discounting (Cons)
- Discounting is usually only available to SME’s and larger companies with more than £100,000 annual turnover
- Invoice discounting providers will want evidence that you have robust credit control processes and reliable customers
- Some businesses can become overly reliant on invoice discounting and find it difficult to function without it.
Summary
On the whole, if you own a smaller business that has trouble chasing customers and collecting payment, factoring is likely to work better for you. Factors are experienced in credit control, and you’re likely to see fewer unpaid invoices. However, for companies with reliable customers and a more substantial turnover, invoice discounting is a cheaper option for businesses who can manage their credit control in-house.
