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We understand why you might be asking, “is invoice financing risky”? We all want to avoid making a bad financial decision for our business. One wrong move and you could be out hundreds if not thousands of dollars, which takes months to recover from. We understand the hesitation and worry on a personal level, as we’re entrepreneurs ourselves. Let’s answer the question in the title directly:
Is Invoice Financing Risky?
The good news is that invoice financing carries minimal risk when you’re dealing with creditworthy customers who consistently pay their invoices on time. If you took on customers confident that they would pay you, you can feel confident financing their invoices. Also, by actively managing additional risks associated with invoice finance that we’ll cover belwo, you can further mitigate concerns. It’s also worth noting that the risks tied to invoice financing can be smaller compared to traditional financing methods. Let’s go a little deeper into why invoice financing can be a safer option for your business needs.
Ready to explore invoice financing?
Invoice Financing Risks and How to Manage Them
Invoice financing can be a useful way for businesses to improve their business cash flow challenges and manage their access to capital, but like any financing method, it’s not without risks. Here are some of the risks of invoice financing and how they can be managed:
1. Funding invoices for unreliable clients
One risk associated with invoice financing is funding invoices for unreliable clients. Because invoice financing relies on your customer’s credit rating and creditworthiness, if they don’t make their payments, you may not qualify for accounts receivable funding. You could also be on the hook for the unpaid invoice, if you client defaults on payment. This is what’s known as recourse factoring, or factoring with recourse. To mitigate this risk, carefully choose which clients to fund invoices from. Additionally, working with a partner who will work with you when a customer doesn’t pay (like FundThrough) can also help lower the impact of this risk. You might also consider working with a factoring company that offers a type of invoice factoring known as non-recourse factoring. With non-recourse factoring, the factor assume the liability of any funded outstanding invoice (although this type of factoring is more expensive.)
2. Concerns about customer perception and relationship damage
Many business owners believe invoice financing has a negative perception. You might think that your customer will think your business is in financial trouble, can’t serve their business well or has cash flow issues if you factor invoices, but that’s just not true — many businesses factor invoices to speed up access to cash, take on growth opportunities, and more reliably serve customers. Factoring also has a bit of a bad reputation due to bad actors hounding customers for payment. At FundThough, we avoid damaging relationships by treating your customer like our own. Plus, we always contact you first before contacting your customer about payment.
3. Not reading the fine print of the contract
Additional invoice factoring risks include the a perception that many traditional factoring companies charge hidden fees, don’t fund the full invoice amount, or make you sign contracts that force you to fund all invoices for a customer or fund a minimum dollar amount every month. Hidden costs can quickly add up. That’s not something you need to worry about with FundThrough. We don’t charge any hidden fees and we’re transparent about our prices, so you always know complete funding costs before you factor an invoice.
Beyond just spotting hidden fees or funding minimums, there’s a whole list of elements you should be keen on analyzing to ensure you’re making an informed decision. Here’s what to look out for:
1. Required Funding Minimums: Understand if there’s a minimum dollar amount you must factor within a certain period. This can affect your flexibility and financial planning.
What to Ask: Are there penalties for not meeting these minimums? What if I don’t need funding every month?
2. Hidden Fees: Beyond the surface, fees can lurk in the fine print. These might include service fees, processing fees, or additional charges for expedited funding.
What to Look For: A detailed breakdown of all potential fees. Ask for examples of how these fees have applied in typical scenarios.
3. Service Level Agreements (SLAs): These outline the expected turnaround times for funding and passthrough payments you can expect.
Specifics to Ask About: What are the exact timelines for receiving funds once an invoice is approved for funding? For passthrough payments that aren’t being funded? Are there any guarantees or compensations if these timelines are not met?
4. Advance Rates: This is the percentage of the invoice value that you’ll receive upfront. The remainder, minus fees, is paid once your client settles their invoice.
Critical Questions: What factors might affect the advance rate? Is this rate negotiable based on volume or customer creditworthiness?
5. Funding Limits: Understand both the minimum and maximum amounts that can be financed. This is especially important if your company is in a capital-intensive industry.
Clarifications Needed: How are these limits determined? Can they be adjusted over time based on financing history or business growth?
6. Recourse vs. Non-Recourse Factoring: Know whether you’re responsible for buying back unpaid invoices (recourse) or if the invoice financing company assumes the risk (non-recourse).
Insights to Gain: What are the cost differences between recourse and non-recourse factoring? Under what circumstances might an unpaid invoice need to be repurchased?
7. Contract Duration and Termination Clauses: Understand the length of your commitment and what it takes to terminate the agreement if needed.
Details to Uncover: Are there early termination fees? What is the notice period for contract termination?
8. Customer Interaction Policies: How the invoice financing company interacts with your clients can affect your business relationships.
Key Considerations: Will the company contact your clients directly? How are disputes or overdue payments handled?
Just as you would with any contract, always read the fine print and ask questions. Clarity at the outset can prevent misunderstandings and conflicts down the line.
4. Not properly recording invoice financing transactions in accounting
Many business owners think that recording invoice financing transactions in their accounting software is confusing or difficult. Don’t stress. Our step by step guide will walk you through the process.
5. Choosing a partner with a slow, manual process
The policies and manual processes of traditional invoice financing companies result in a slow, expensive, rigid solution. FundThrough’s tech-powered invoice financing solves the problems of traditional invoice funding while making the benefits even better:
- Quick and Simple Application: With FundThrough, you’re not bogged down by paperwork. Our process is designed for speed and simplicity, getting you from application to funding quickly.
- Flexibility at Your Fingertips: Choose which invoices you want to fund (whether it’s just one, or your entire book—that’s up to you). Our solutions are tailored to meet your specific needs, offering the flexibility to finance the invoices you want, when you want, with no minimum funding requirements after your first funding.
- Unlimited Financing Potential: Unlike traditional models that may cap your growth, FundThrough provides financing that grows with your business.
Transparent, No Hidden Fees: We charge one, upfront fee, so you have transparency from the beginning of our relationship. - 100% Advance Rates: Get more from your invoices with our competitive advance rates, putting more capital at your disposal for immediate use.
- Seamless QuickBooks Integration: Our platform seamlessly integrates with QuickBooks Online, simplifying invoice selection and funding.
By choosing FundThrough as your invoice financing partner, you’re not just securing a financial solution; you’re investing in a partnership that supports your business’s growth and financial health both now and in the future.
Finance Your Invoices with a Dedicated Partner
FAQs
Is invoice finance a good idea?
Invoice finance is a good idea for many businesses. If you’re looking to speed up payments, eliminate late payments, improve cash flow issues, and lessen the admin associated with chasing down invoice payments, invoice financing could be a fit for your business. It’s also a good option for businesses with little or no credit history, bad credit, or a low credit score who don’t qualify for traditional bank loans. Even if you qualify, you may want to avoid bank financing hassles. With invoice finance solutions, the approval process is faster and easier. Because it relies on the credit risk your customer poses rather than your business credit history, your risk profile is lowered. Financing your outstanding receivables also gives you steady cash flow to take on business growth.
Why is invoice factoring risky?
Invoice factoring can be risky, but the major potential risk has to do with your unpaid customer invoices. If your customer doesn’t pay their invoice on time, you could be on the hook for any outstanding invoices. There’s also the risk that your customer relationship is damaged by an invoice finance company, which is why it’s important to work with a invoice finance provider that prioritizes your relationship with customers.
What are the problems with invoice factoring?
There are a couple of perceived problems with invoice factoring, including not reading the fine print of your factoring agreement. This misstep could leave you paying costly service fees, invoice factoring fees, application charges, or other additional charges. Additionally, working with invoice factoring companies that use manual processes could lead to a delay in funding.
What is the disadvantage of invoice financing?
The main perceived disadvantages of factoring as a type of financing include the need for customer contact, that factoring transactions are difficult to account for in bookkeeping, the lack of control over the collections process, and the cost of invoice financing.
What Is Invoice Financing?
Invoice financing is often just another name for invoice factoring, which is a form of receivable financing where a business owner sells invoices to a financing company to get funding quickly. You receive cash for the invoice amount, usually less any fees, ahead of the payment terms. Your customer, who is responsible for paying the invoice, instead pays the invoice amount to the receivables financing company according to the original payment terms. Invoice financing services are a flexible way to get funding for your business any time you need it to cover operating expenses like payroll and inventory purchases, or taking on a growth project. Many businesses like this form of invoice finance as it helps them solve cash flow challenges and bridge cash flow gaps. Here are a few invoice financing examples if you’d like to see how it can work.
It can also refer to when an invoice financing company gives you cash for your unpaid invoices, but you (rather than your customer) repays the accounts receivable financing company yourself.