Accounts receivable or factoring invoices pros and cons

Accounts receivable or factoring invoices pros and cons

Invoice factoring or accounts receivable funding is a particularly popular means of financing companies with problems of cash flow due to commercial clients that pay very slowly. The reason why factoring invoices is the most preferred way for businesses to curb the shortage of cash flow as the mainstream micro business financing loans aren’t within the reach of small and medium sized business owners. Best invoice factoring companies gives smaller businesses an access to capital funding immediately. In contrast to the traditional accounts receivable process, such a method helps companies receive much faster funds.

The benefits of getting funded by accounts receivable can be a powerful solution for businesses. But even before signing any accounts receivable agreements, businesses must understand exactly what is this financing, factors associated with it, and the factoring invoices pros and cons.

What are factoring invoices?

Accounts receivable financing, known as Factoring is probably one of the oldest means of financing. In this, sale of invoices or outstanding receivables is made to a specialized or the best invoice factoring companies, which in turn analyzes the risks involved and issues swift influx of cash to the concerned bank with which the business is associated.

Is factory agreement similar to a bank loan?

No, there is a vast difference between both. Factoring agreements have a prime rate, which is an essential part of an accounts receivable funding with varied interest amount. In it there are another two aspects that you must closely consider:

Purchase date – Normally, purchases are paid in a 180-day agreement and the factoring company will collect the accounts receivable invoice payment. Here the reserve amount or the cash held is usually about 2% to 20%.

Agreement duration – The term of the agreement is a crucial factor that signifies whether the duration of contract is for a shorter time period or for the long term.

Understanding the advantages with factoring invoices

Just like any other business financing, accounts receivable funding isn’t anything different when it comes to some added risks. But, first the advantages:

Get access to cash immediately – Even though factoring invoices pros and cons exist, the most important advantage that highlights it among small business is the immediate cash flow to fund your expenses and payment. It helps you to take on new clients.

Mention payment terms to clients – Factoring helps businesses to offer payments to clients as they can fund their invoices. Since you already know that you have access to immediate cash, you can offer payment terms without any negative consequences.

Better manage client credits – By outsourcing the task to the best invoice factoring companies you get to determine in advance based on client credit reviews whether they are worth the payment.

Easy funding option – Just by providing invoices of work delivered payable by reliable customers you can get access to financing easily.

Knowing what aspects can be of disadvantage

Highly expensive – Undoubtedly, the biggest disadvantage of the factoring invoices pros and cons is its cost. Factoring invoices is expensive when compared to other financing solutions. The true cost of factoring is variable and can range from 1%-4% for a 30-day period.

Resolves only cash flow shortage – There are often a number of benefits that come with other types of financing solution, but factoring invoices solves just one problem i.e. the flow of cash.

Repeats the same process – For every cash in advance required you must submit copy of your invoices, schedule accounts, and provide any associated documentation.

Clients get contacted first – The best invoice factoring companies will at first send a standard letter to your clients to keep them informed that they are managing your company’s finances. They will even let them know about any delays in late payments or other issues.

Financing ruled out due to bad debt – Although the best invoice factoring companies will limit bad debt issue, still they will not pay for some invoices. The task must be performed by a collections company.

Always associate with the best invoice factoring companies that have specialties and can help your business overcome financial challenges.