There are a number of compelling benefits for businesses that use invoice finance to release the cash tied up in unpaid invoices.

Rather than waiting 30, 60 or 90 days to be paid by a customer, businesses can release up to 95 percent of the value of an invoice within 24 hours of its issue. But while that might sound like the perfect option for your business, there are also a number of drawbacks you may face when using an invoice finance facility rather than traditional funding sources like a bank overdraft, loan or business credit card.

We’re going to take a closer look at the advantages and disadvantages of invoice finance to help you determine whether it could be a suitable finance facility for you.

The Advantages of Invoice Finance

Invoice finance has a unique range of advantages that make it unlike any other source of business finance.

(1) Improved cash-flow

Undoubtedly the biggest advantage of invoice finance and the main reason why so many businesses choose to use such a facility is the improvement it can make to your cash-flow. Being able to release the funds tied up in invoices so quickly puts businesses in a better position to cover company expenses and capitalise on new opportunities when they come along.

(2) The ability to extend payment terms with confidence

Waiting 30, 60 or 90 days for payments can stunt the growth of smaller businesses, but not offering payment terms that are considered standard in your industry may make customers going elsewhere. Invoice finance allows business to extend payment terms to their customers without having to worry about the detrimental impact it could have on cash-flow.

(3) Funding is available quickly

An invoice finance facility can be set up usually within a week or two of your initial contact with a provider. Once the arrangement is in place, the funds can often be released from an invoice within 24 hours of it being issued to a customer. That allows you to respond quickly to a cash-flow shortfall and raise funds for other business expenses.

(4) Most businesses meet the qualification requirements

Unlike other sources of business funding, invoice finance is relatively easy to qualify for. Most companies that do not have major financial issues and work with reliable customers that do not have adverse credit records should qualify. Factoring, in particular, can be a suitable source of finance for startups and small businesses that cannot access traditional credit streams.

(5) The amount you can borrow grows in line with your business

As the credit line is based on the value and quantity of your invoices, the amount of funding you can access increases in line with your revenue. That important advantage makes invoice finance a financial platform that can support your growth now and in the future. It also makes it possible to access more capital than you could potentially obtain from a bank overdraft or loan.

(6) No requirement for security

It is not always necessary to provide assets as security to set up an invoice finance agreement. In many cases, the only security required is the invoice itself. That can make invoice finance an option for businesses that have few assets and cannot access other financial products.

The Disadvantages of Invoice Finance

Of course, no source of finance is without its drawbacks. Invoice finance is not perfect for every business and there are a number of disadvantages you should be aware of so you can make an informed decision.

(1) It solves a very specific problem

Invoice finance is designed to specifically address the problem of insufficient cash-flow. If you have customers that pay your invoices on time and within reasonable payment terms then this form of finance may not help you. If you want access to capital to buy new machinery or equipment then other forms of finance may be more suitable.

(2) It may cost more than other finance types

The cost of invoice finance has fallen over the last few years as competition in the industry has soared. However, it may not be the cheapest source of finance available to you. You should always get quotes from multiple invoice finance providers and compare the cost against other credit streams.

(3) Customers may know there is an arrangement in place

Your customers may be aware that an invoice finance facility is in place. That depends on whether you choose a factoring or invoice discounting arrangement. Factoring providers are responsible for collecting payments from customers and will deal with them directly. That could damage the relationship you have with those customers. Invoice discounting allows a business to retain responsibility for collecting payments so the customer does not know the arrangement is in place.   

(4) Your customers must be other businesses

Invoice finance is only available on commercial invoices where the customer is another business. If you sell products or services to the general public then this form of finance will not be available to you.

Get an invoice finance quote

If you’d like to find out more about invoice finance then take a look at our Knowledge Hub. If you want to see how much invoice finance could cost you then you can compare quotes from more than 40 of the UK’s leading providers in minutes.