What are the Pros and Cons of Invoice Financing?

Invoice Financing Pros

Below is a list of pros for invoice financing.

• Can help small businesses facing cash flow gaps due to unpaid accounts receivable.
• Easier to qualify compared to other types of business loans even if your business is new or your credit is bad. Lenders will care more about the value of your invoices and your clients’ payment history.
• Your customers won’t be notified you have invoice financing because you’ll be collecting your customers’ payments. This is a perk if you don’t want your customers to be notified by a third party.
• Invoice financing typically has lower fees compared to invoice factoring.
• Invoice financing is more flexible than invoice factoring since you’ll receive a line of credit rather than a lump sum payment.

Invoice Financing Cons

Below is a list of cons for invoice financing.

• Is typically still expensive even if invoice factoring is more costly. Lenders can charge fees in various ways, but regardless you’ll likely pay 1%-6% of the value of the invoice per month and have a much higher APR compared to a bank loan.
• Relies on payments from your clients. The amount of the fees you pay depends on how quickly your clients pay your invoices. This makes it tough to project how much your financing will cost. In addition, if your customer pays late, then you will face additional fees. Further, if your customer doesn’t pay at all, then you will be responsible for the debt.
• Collecting payments may be tough if you have a small business. You might not have the manpower to follow up with customers for unpaid invoices.