Invoice Financing: Exploring its Limitations | Behalf

By February 6, 2017Factoring
the limits of invoice financing

Invoice Financing: Exploring its Limitations

Invoice financing is popular among companies that extend trade credit to their business customers. Though it definitely increases sales, trade credit also opens the door for slow, non-paying customers to buy more of your company’s goods and services. Trade credit widens the gap between the time it takes for customers to make purchases and pay for them. As a result, your company doesn’t benefit from all of its sales right away. If your company – like every company – needs the funds from outstanding invoices to cover operational expenses and payroll, you might want to consider invoice financing.

Once you sell your invoices to a factoring company, you get a cash advance and they take it from there. Factoring companies collect payment from customers, which may bring your accounts receivable department some relief. That being said, like any form of financing there are some trade-offs. Invoice financing is an expensive commitment your company might not be ready to make. It’s time to skip the fluff and get down to the nitty-gritty. Here’s what the factoring companies don’t want you to know: invoice financing has major limitations. This article explores its limitations, to help you rule out whether or not invoice financing is a viable solution for your company.

  • Not for all Customers

Factoring companies can be highly selective in which of your customers they finance. In some cases, they will want to verify your customer’s creditworthiness. They can reject customers with bad credit history or those that demonstrate late or missed payment history, which could strain your existing customer relations. Invoice financing also leaves your company accountable for customers that fail to make payments. In the end, your company will be responsible for the rates and fees they owe the factoring company, as well as their customers’ outstanding debts to the factoring company. In other words, the burden of unpaid invoices ultimately falls on your company. You should only commit to invoice financing, if you are confident your customers have good credit, are stable, and will eventually complete their payments.

  • Undermines Sales

If you’ve gotten this far, you know invoice financing is expensive. Here’s how: the cash advance factoring companies speak so highly about is only a portion of the invoices you sell. Typically the cash advance is about 60-80% of the invoice amount. You also incur service fees and interest charges on the factoring company’s cash advance. Despite the residual amount you receive from the invoice financing company once customers pay, you only receive a portion of the amount of the original invoice. Consequently, invoice financing greatly reduces your profit margin.

  • Strains Customer Relations

Once you sell your customer’s invoices, they have to interact with your invoice financing company to fulfill payment. You need to be very selective with which company you use, as it will directly impact your customer’s experience. A bad interaction with the invoice financing company, could damage your customer’s perception of your company and damage your reputation. The invoice financing company becomes an extension of your company. Some customers may be turned off by the fact that they are passed off to another company, especially when they have dealt directly with your accounts receivable department in the past. Transitioning customers to the invoice financing company should be handled with care. You don’t want to give customers a disruptive experience; it will decrease the chance that they will return to make future purchases.

There are other ways to accelerate your receivables that are more cost effective, and also increase sales. Instead of invoice financing, consider offering your customers a business line of credit so they can always pay you on time. Behalf’s business line of credit can increase your customer’s purchasing power up to $50,000. There are no hidden fees and affordable rates for both your company and its customers. Your business customers can make larger, more frequent purchases when they use the line of credit to pay you, the vendor. You get paid within 1 day and your customer can customize their payment schedule and extend payment to Behalf up to six months. The funds on their line of credit replenish as they pay, giving them constant access to working capital.

Learn more about how Behalf is transforming the way businesses buy and sell here.