Are you looking to finance your business in the short term? Did you know that invoice factoring can help you attain cash very quickly? Many UK businesses do this regularly to gain cash flow.
But what is invoice factoring? And, are there any negative aspects to carrying out this procedure for your business?
Well, we do have answers to these questions. In this short guide, we’ll take a look at the differences between invoice factoring and invoice discounting. Furthermore, we’ll look at the benefits and risks of invoice factoring. So let’s get to it!
Invoice Factoring vs. Invoice Discounting
So first of all, to alleviate any confusion, we’ll explain the difference between invoice factoring (or invoice financing) and invoice discounting.
Invoice factoring is when a company buys your outstanding invoices. As a business, you can do this to improve your cash flow. The great thing about this is the company will give you the cash straight away once they have all your invoices. However, what they will also do is pay you less than the total amount of the invoices so they can make a profit.
So instead of you having to chase up customers and never having a large enough cash flow to do anything, you let the factory company go directly to your customers. You’re essentially outsourcing the collection of unpaid invoices.
Invoice discounting is different in that a company will provide you with a loan, based on the total value of your invoices. Your invoices act as security for the loan.
Benefits of Invoice Factoring
One of the main advantages of invoice financing is that you can have a more predictable and improved cash flow. Plus, you can seize on opportunities that you otherwise wouldn’t be able to do with limited cash flow.
Many businesses may resort to this business practice if they look like they may go out of business soon. It buys them some time to strategize how they will keep their business afloat.
Another benefit is that it is easier to get and cheaper than a conventional bank loan. As well, it may be a cheaper option for businesses that need to employ credit control employees. Here’s some more info if you want to learn more.
Risks of Invoice Factoring
There are a few risks and disadvantages to invoice factoring. The main risk to this practice is that you can end up ruining customer relationships. So you must understand how the factoring company conducts itself with your valuable customers.
Also, if you have few customers, then this type of financing isn’t going to work for you. The main reason is that factoring companies prefer a larger pool of customers so they can spread out their risk.
Furthermore, there may be extra costs involved if your customers turn out to be much worse at paying their invoices than the initial calculation. This may happen because you shouldn’t think that invoice factoring will take over all your debts. Their job is to do a simple collection service after all.
What Is Invoice Factoring Put Simply?
In short, the answer to “what is invoice factoring?” is simple: It is a way for a business with many customers to gain cheap finance by selling their invoices to a factoring company. As we have mentioned, there are benefits and risks involved, so it’s important to consider all of them before committing to this business practice.
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