Thursday 11st Jun 2020
When it comes to lesser known finance products, it’s always worth being fully armed with the facts before considering them as an option. Funding solutions are not always equal, and there can be significant cost differences. With loans and similar finance solutions, there can be the risk of unpayable debts and increasing charges. But what about invoice finance? Are there risks associated with this non-traditional type of lending? Is it a risk-free choice, or are there issues to be aware of?
There are certainly a few things that you’ll need to bear in mind as the client. These will also depend heavily on your agreement in particular, which is why it’s essential to fully understand what sort of contract you’re signing up to. This will also help you compare invoice finance products from different providers. Always compare like for like wherever you can.
Relying on invoice finance for cash flow
Becoming over-reliant on invoice finance is one of the risks, particularly if costs increase. Invoice finance doesn’t have to be a permanent solution, and does of course have an ongoing cost associated with it. If your customers repeatedly pay late, or you’re in an industry in which invoices are well known for having long delays, then you might find that factoring costs are higher, or increase at a later date. You must ensure that the fees associated with your facility are sustainable. Find out more about managing cash flow in our cash flow clinic.
Changed customer relationships
Invoice finance is a relatively broad term encompassing several different types of product, including factoring. With this type of invoice finance, your customers will be aware of the agreement, so one of the risks of invoice factoring is that there can be the risk of a changed relationship if you introduce the facility. Discounting may be more appropriate if this is a concern, as this is a confidential agreement, allowing you to continue invoicing customers the same way you always have done, but with a couple of extra steps behind the scenes.
Excessively late or unpaid invoices
With Invoice Finance, your provider will release the cash of the invoice up to 90% of the value. Once your customer has settled their invoice in full, your provider will then release the remaining 10% or the final percentage amount. If your customer is very delayed in paying your invoice, the final amount won’t be released for some time, until your customer pays in full. Don’t worry though, as your provider’s expert credit controllers will be dedicating their time to chasing these unsettled invoices.
We always advise that you get expert advice from an independent financial adviser before making a decision on whether such a product is right for your business. It is also worthwhile researching a few providers not just for a quote comparison but more importantly to understand their levels of service and technological capabilities. The advantages of invoice financing can be significant.