It is one of the oldest, quickest forms of commercial financing. Also known as factoring, it involves selling invoices to specialized financing companies that give you quick financial compensation. They take on the risk of collecting the receivables. The hassle-free, quick-cash method is alluring to many entrepreneurs; however, before you go for it- you should fully understand the advantages and the disadvantages that come with it.

Talking to business leaders, we have compiled a list of the most important pros and cons of using business receivable financing.

Pro #1: Minimal Credit Requirements

“With invoice financing or factoring, the financing company considers most about the essence of your invoices. If your customers have sufficient credit and pay on time, your credit score isn’t crucial. This is because your invoices serve as insurance, and for the lender, your customers don’t pay for the downside venture. Therefore, if you can show that you have loyal customers, you can obtain invoice financing without a stellar credit history.” (Daniel Foley)

Con #1: Lack of Control

“While some entrepreneurs appreciate outsourcing payment collection to factoring companies, others may bridle at the loss of control. After all, collecting payment is an essential and sometimes sensitive part of your customer’s experience. If you choose to factor your statements, you lose all control over this essential part of your customer’s interaction with your brand.”

Daniel Foley, CMO at Scooter Guide 

Pro #2: Ability To Outsource The Collection

When you accept invoice factoring, the factoring company takes overpayment collection. For many entrepreneurs, this takes a considerable administrative burden off their plate. However, keep in mind that this is just the case for invoice factoring. With invoice financing, you’ll still be required to collect invoice payments. 

Daniel Foley, SEO Executive at MCS Software Rental

Pro #3: Quick Cash

“Accounting receivable finance is one of the fastest ways to get additional working cash. Depending on the lender, you may get your funds in as short as 24 hours. For short-term cash flow issues, invoice finance is a wonderful solution.” (Edward Mellett)

Pro #4: Minimal Credit Needs

“The quality of your invoices is important to invoice finance companies. Your credit score is irrelevant if your consumers pay on time. Your invoices are collateral, and the lender’s risk is that your customers don’t pay. So, if you have solid customers, you can get invoice financing without good credit.” (Edward Mellett)

Pro #5: Outsourcing Collection

“As stated previously, invoice factoring companies receive payments on your behalf. This relieves many entrepreneurs of a substantial administrative burden. But keep in mind, this is exclusively for invoice factoring.” (Edward Mellett)

Con #2: Expensive Account Fees 

“The cost of receivable finance can quickly add up. Your rate is based on volume and average invoice value. Your company’s niche Customer credit and payment history.” (Edward Mellett)

Con #3: Instability

“Some business owners enjoy outsourcing payment collection to factoring providers, while others dislike losing control. After all, payment collection is an important—and sensitive—part of your customer’s experience. Your customers would lose touch with your brand if you opted to factor your invoices.” (Edward Mellett)

Con #4: Customer Reliance

“An important feature of invoice financing is its reliance on customers. On one hand, your odds of approval aren’t as high as with other forms of credit. However, if your consumers have bad credit or bad payment history, approval may be difficult. If you get authorized, you’ll also pay a larger factoring cost. You may be charged more if your consumers pay late.”

Edward Mellett, Founder/Co-Founder WikiJob.co.uk

“Actually, every business financing option has its own pros and cons.” says Chris Taylor, “Accounts receivable financing is no exception: 

Pro #6: No Collateral Requirement

“Accounts receivable financing is a type of unsecured financing that does not ask you to provide any collateral in the form of assets or guarantors.” (Chris Taylor)

Pro #7: Hold Possession of Your Business

“This type of financing does not require you to give out a part of your business possessions so as to acquire funding.” (Chris Taylor)

Con #5: Higher Costs

“As it is the fastest way of getting access to funding for your business, it may come at higher costs than the rates charged on other types of business loans. Consider the fact that failure to repay the amount at the predetermined time will only increase the whole amount that you may be required to pay.” (Chris Taylor)

Con #6: Lengthy Contracts

“Some of the agreements can be short-term and promising, but others can be longer and more meandering than you would like. It’s very important to negotiate the terms of the contract that flawlessly works for your small business. 

“Businesses of any type will at one point need business credit to help with various daily operations. At a point, the small business may additionally require short-cash to fuel its operations. Unfortunately, credit access has turned out to be so tight, mainly for small businesses, with many banks and credit unions reluctant to offer viable assistance. Accounts receivable financing can help businesses to remove those financial hurdles.”

Chris Taylor, Marketing Director Profit Guru

Pro #8: It Lets You Offer Clients Payment Terms

“The majority of large commercial and government clients require bills to be paid within 30 to 60 days. If you can’t offer payment conditions, you’ll have a hard time attracting these businesses as clients. Because you can finance your invoices immediately after they’re created (as long as the goods/work has been delivered), factoring allows you to offer payment arrangements to your clients. As a result, you can give terms without fear of financial repercussions.” (Bradley Bonnen)

Con #7: It is Labor-Intensive

“Factoring can be a time-consuming process for the client. You must submit a schedule of accounts, a copy of your invoices, and any backup paperwork each time you request an advance. This task is frequently completed via email or the internet.”

Bradley Bonnen, Founder & CEO of iFlooded Restoration