Many businesses have started using invoice factoring to solve their short-term liquidity issues. Invoice factoring is a handy financial tool that helps keep businesses afloat during tough times. However, you fully understand how it works. Invoice factoring is a financial transaction in which a business sells its invoices at a discount to an external factoring company. Factoring companies typically advance a large percentage of the invoice value upfront. The factoring company will remit the remaining balance minus a fee. In this article, Kore Capital Corporation outlines the pros and cons of invoice factoring.
The Pros of Invoice Factoring
What is the greatest benefit of invoice factoring? You can receive the money owed to your business without having to wait for customers to pay you back.
– Quick cash: invoice factoring is a great way to get immediate working capital to help cover liquidity gaps caused by outstanding invoices.
– Improved cash flow: Invoice factoring covers the gaps left by slow-paying customers while keeping good payers on the same payment terms and improving your cash flow to grow your business.
– Easier approval: If you are unable to get financing from other sources, such as a bank, then invoice factoring offers a more efficient solution. Factoring companies focus on the value of your payable invoices. They also look at your customers’ creditworthiness as criteria to qualify you for the loan.
– No collateral required: invoice factoring is an unsecured loan. You don’t need collateral as you are essentially selling your payable invoices to the lender.
The Cons of Invoice Factoring
Conversely, factoring provides many benefits for B2B companies with slow-paying customers. But, there are also disadvantages:
– Costs: Invoice factoring can be expensive if you are not mindful of the interest and other fees that could be incurred as a result of late payments and other repayment shortfalls.
– Loss of direct control: the invoice factoring company often collects on the invoices directly, which means you need to ensure that you are dealing with a reputable company with ethical practices.
– A Customer’s bad credit or payment history affects your financing: the success of your application depends on your customer’s creditworthiness. Somtimes the lender has reason to believe that your clients won’t pay. If so, they would be entirely justified in refusing your application for financing.
– No guarantee of collection: When the factoring company cannot collect on one or more of your invoices, they may require you to make up the shortfall by buying back the unpaid invoices or replacing them with ones of equal or more value.
All these things considered, invoice factoring is a great way to cover your liquidity shortfalls on straightforward terms. Contact Kore Capital Corporation and let us work out a short-term financing solution that works for you.