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The advantages of invoice financing over traditional loans

Category: Features — Gary Cain on July 28, 2013

Invoice financing is a great alternative to taking out traditional loans. There are several advantages to borrowing using invoices as collateral over going down the conventional route. With this in mind, here are some of the benefits.

Available to all

It is possible for all kinds of businesses to benefit from invoice factoring and financing. Basically, any business that raises invoices can borrow in this way. This includes sole traders as well as SMEs and large national or multinational companies.

Ease of borrowing

Borrowing using invoice factoring is much easier than applying for loans from traditional sources. All the business owner has to do is provide details of the invoices they wish to borrow against. There are no complicated forms to fill in and there is no need to provide a business plan or to explain how the money will be used.

Speed and simplicity

The entire application process takes hours rather than days. Firms usually know within 24 hours whether an application has been approved. Once the decision to lend is made, the cash is transferred electronically, and will be available for use in a day or so.

When a company applies for a loan using invoice financing, the cost will be explained in advance – there are no nasty surprises. The company borrowing cash knows exactly how much the loan will cost.

Flexibility

With invoice financing, the company borrowing the money is in complete control of its cash flow. It will determine how much it borrows and exactly when it takes that cash.

One month a firm may decide to borrow against all of its invoices to allow it to buy the raw materials needed to start work on a big contract. The next month, it may wish to borrow against just a few invoices to bridge a temporary shortfall. It could, of course, decide to borrow nothing at all.

This helps to keep the cost of borrowing cash down. With traditional borrowing techniques, it is difficult to arrange a loan for just a month or two to bridge a gap. With invoice financing, however, it is easy to do so. This can mean firms have to pay more interest than is necessary.

Better control

A company borrowing against its invoices has a higher level of control than those which use other forms of traditional lending. It is not unheard of for things like overdraft facilities to be suddenly withdrawn, for example. With invoice financing, this cannot happen.

Credit rating go unaffected

Borrowing against invoices will not have a negative impact on a company’s credit rating. In most cases, banks and other financial institutions will not be at all aware that a company is borrowing money if it is doing so using its invoices as collateral.

Overall, borrowing using invoice financing has many advantages over taking out a traditional loan. It is a method of borrowing which all companies could potentially benefit from, especially when they are struggling to maintain healthy cash flow.

'Disclaimer: The information contained in these articles is of a general nature and no assurance of accuracy can be given. It is not a substitute for specific professional advice in your own circumstances. No action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a consequence of the material can be accepted by the authors or the firm.

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