Pros and Cons: Invoice Finance and Credit Cards

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    Invoice financing is basically short-term borrowing extended by a lender based on the company’s unpaid invoices. Most wholesale retailers sell to their customers on credit. Introducing credit options might tie up funds which could have been used to grow the company’s operations. Invoice financing is used to solve cash flow issues for retailers and manufacturers. One of the advantages of invoice financing is that it’s a much easier way to get a short-term loan from conventional financial institutions. Invoice financing makes it possible for businesses with poor credit to get the financial assistance they need. This will improve cash flow and credit control issues in the business.

    Another benefit to invoice financing would be that this form if financing helps businesses with longer payment terms or late payments. By utilizing invoice financing businesses are able to release 90% of unpaid invoices and boost their cash flow within 24 hours. This method of financing promotes growth within the business. Boosting cash flow will allow businesses to expand their operations as they now have the funds to do so. Businesses will be able to keep up with massive sales growth because they have cash on hand to maintain day-to-day operations. It also maximizes the operational growth of the business which would allow business to expand on an international scale. New invoices would mean new funding for the business. Most factoring companies managed the sales ledger of the business client, so there is a sense of security with their sales ledger. 

    Invoice financing has many benefits but it’s not all smooth sailing as there are a few disadvantages with this type of financing. Firstly, invoice financing requires a lot of commitment as smaller businesses would have to commit a large part of their debtors’ books. Some factoring companies have responded to this issue by introducing selective invoice finance. This form of invoice financing lets businesses sell individual invoices or receivables. Selective invoice finance doesn’t involve an agreement with the businesses’ entire sales ledger. This form of invoice finance typically allows businesses a 100% advance on individual invoices. Businesses with healthy turnovers and many years of trading should consider selective invoice finance. 

    Secondly, this form of financing would be the increased amount of administration. For smaller businesses that lack resources this sort of financing requires more administration in regard to credit control. Most factoring companies will charge an administration fee as they normally manage the sales ledger and credit control of the business. Non-recourse factors will charge more as they assume the risk of unpaid invoices. Although this might give the business peace of mind the cost of adopting this method might prove to be too much for smaller businesses. Although recourse factors might be cheaper, the business will have to assume responsibility of unpaid invoices and must settle the debt. This type of financing is more suitable for companies with higher profit margins.

    For start-up businesses, employing the use of credit cards could be extremely beneficial.  Credit cards are usually quick and easy to get accepted for and businesses can borrow as certain limits and pay it off. Once they pay off their credit card, they can access the funds again. This will make paying for good extremely convenient and can improve the credit ratings of the business without the use of collateral. Credit cards can help businesses manage their fund more efficiently and they can take advantage of interest-free periods. Credit cards give businesses more purchasing power and can increase operationalization. They also make it easier to track spending and pick up on fraud. During an emergency or an unexpected event credit cards provide simple and accessible solutions. As mentioned before, they can also improve the credit score of the business and build a credit history. 

    There are a few disadvantages to credit cards as they require a limit which can be problematic for the business. During the application for a credit card the financial institution will check the credit score of the owner which will affect the outcome of the application. Credit cards also typically have higher interest rates, so they need to be managed correctly to avoid being stuck in a cycle of debt. If the business carries a balance on their credit card month to month then they can rack up charges and interest. If businesses are not careful, they can end up with a mountain of debt through credit cards. The convenience of credit cards could also lead to overspending as you are spending money you don’t have yet. Although tracking fraud is much easier with credit cards, there is still a danger of having them stolen along with your money and identity.