Five common misconceptions about invoice financing

Five common misconceptions about invoice financing

Managing your cash flow well is often the determining factor as to whether your company succeeds or fails. Fortunately, the advent of invoice financing has made addressing this challenge much more comfortable.

With customers often taking more than 30 days (some 90 days) to pay,  invoice financing offers a useful funding alternative to taking out a pricy and inflexible bank overdraft or loan.

However, some misconceptions stand in the way of making use of this valuable form of financing.

It signals your company isn’t doing well

There is a concern that if a company is seen to have cash-flow constraints that need funding, the company will be seen to be in trouble.

To the contrary, the need to manage cash flow is often a result of your success. For instance, you could be getting new business faster than you can keep up with your invoice collections. Thus, whether you are in the first few years of building your business or in an unexpected growth phase, invoice financing is good business practice. It removes a common constraint to growth in smaller firms.

It smooths out cash flow during seasonal peaks and troughs in your business. It also allows you to focus on doing what you do well, sourcing and growing the revenue streams of the company.

It is expensive

The belief that invoice financing is expensive is probably one of the most common misconceptions about this finance alternative. The cost of invoice financing varies substantially between providers, and thus, it is very important to understand what the company is charging, if they charge ongoing facility or audit fees.  Also ask if there are break fees if you decide to cancel the contract.   Some companies will also charge any time you want to add debtors or change facility limits, so make sure you ask these questions before you sign up.

You are giving away control – and will become tied in with an invoice financer

There is a concern that by using an invoice financier, you will be giving up control of your business and the finance company will tie you in. With flexible invoice financing companies, this is not the case. You remain in charge of all aspects of your business and can often choose to allow the invoice finance company to follow up on invoice payments or do that yourself. You can also select which invoices, and what percentage of them, you want to finance. The decision is yours.

While charges do vary substantially between providers, sometimes invoice finance companies will charge an ongoing administration fee and a funding cost on the value of the invoice financed. The finance company deducts the funding payment when the end-customer settles the invoice in full and, at that point, pays the remaining amount owing to the company .

It is crucial to establish how much flexibility you want to have in the funding of your invoices. Many invoice financing firms that handle all aspects of your invoicing process (an invoice factoring service) will offer to fund all your invoices. A full service such as this has cost implications because you will be paying interest on your entire debtor’s book. It is something worth considering if you want to outsource your full debt collection function

Your customers will not like being contacted by a third-party

Business owners, particularly owners of small companies, spend a lot of time building strong relationships with their customers. For that reason, they may be hesitant to allow an unfamiliar third-party to contact their customers.  There’s also a concern that the invoice financing company could be heavy-handed with the customer in seeking payment. These considerations are understandable, given that maintaining strong and positive customer relationships lie at the centre of any business’ success.

That’s why it is so important to choose a reputable and professional invoice finance company. It needs to be one that understands your business, your concerns, and will represent you in the way you require. Also, you can choose to keep control of the invoice payment process.

You become tied in with the invoice financier

A common misconception is that an invoice financing company expects you to hand all your invoices over to them. Some invoice finance companies may require this, but others are happy to engage in an as-and-when service. You can fund only the invoices you choose and you can say when you want them funded.  There is no requirement to give them your entire receivables book.

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