Factoring Invoices Pros and Cons: An In-Depth Look at the Mechanics of Invoice Factoring

Another important factor to consider before applying is the pros and cons of invoice factoring. Weighing your options allows you to make better financial decisions for your company.

Pros of Invoice Factoring

• Ongoing cash flow. Factoring your invoices doesn't have to be a one-time transaction. The key is to build a relationship with your factoring company and continue factoring your invoices with them if it makes sense for your business. As a result, maintaining a positive cash flow wouldn't be a problem.
• Immediate access to working capital. Small business owners know the struggle of applying for a bank loan. It usually takes months before you're approved of a loan and a few more weeks to receive the funding you're qualified for. On the other hand, invoice factoring provides you with the cash you need within 24 to 48 hours. This is especially beneficial for businesses that need to address short-term financing needs.
• Higher chances of approval. Unlike traditional loans, collateral, credit score, and financial history are not major determining factors to qualify for invoice factoring. Lenders are typically more concerned about your customers' creditworthiness since they're the ones paying for the invoices. So, you might still qualify for invoice factoring even if your credit score is low or you're new in the business.
• No need for collateral. You don't need to submit your property, equipment, or other forms of collateral to secure the loan. With invoice factoring, the invoices themselves serve as collateral.
• Improve relationships with your customers. Debt collection can be frustrating for you and your clients. When you factor in your invoices, your lender will be the one to collect the payments from your customers. Without you directly collecting the money from them, you'll be able to maintain a positive and long-lasting relationship with your clients.

Cons of Invoice Factoring

• Costly rates and fees. . Some lenders charge high rates and fees, which can be limiting to borrowers. Lenders typically charge between 1% to 5% of the total invoice value, plus they may also charge additional fees, as mentioned above. However, this varies from lender to lender, so ask about the rates and fees before committing. You'll need to decide whether the upfront funding is worth the fees.
• Liability for unpaid invoices. Even if your lender handles debt collections, it's important to remember that they're not a collections agency. In other words, it's unlikely that they're going to go the extra mile to track down late-paying clients. Depending on your arrangement with your lender, you might end up paying for unpaid invoices or trading a different invoice of the same value to cover the loss.
• Limited control. With invoice factoring, you hand over complete control of your invoices to a lending company. This doesn't sit well with some business owners as they don't want another company to access their financial information. Before you apply, be sure that you're comfortable with the lender you're working with.
• Dependent on customers. As mentioned, lenders look at your customers' payment and financial history to measure the risk they're going to take. If your clients have a history of late payments, lenders will assume that they're also not going to be paid on time, therefore, denying your application.