Invoice finance offers a wealth of benefits for businesses, yet it is often faced with scrutiny, due to the misconceptions that cast doubts on its suitability. These myths not only cloud the understanding of invoice finance but also put businesses off exploring its potential benefits.
In this blog, we’ll look to explore and debunk six common misconceptions surrounding invoice finance. Together, we’ll uncover the truth about invoice finance, showcasing its adaptability to businesses in all stages of growth.
Myth 1: Invoice Finance is too complicated and time-consuming.
To the unfamiliar eye, invoice finance can look like a complicated and time-consuming option. Terms like factoring, discounting, selective invoice financing, etc, can sound intimidating to those unfamiliar with the jargon.
The truth is, with all the technological advances and streamlined processes, invoice finance has become a user-friendly, efficient, and accessible option. Which can be broken down into 6 simple steps:
- Step 1: Application and qualification.
- Step 2: Agreement and set up.
- Step 3: Issuing and verification of invoices.
- Step 4: Funds paid into your account.
- Step 5: Client payment and settlement.
- Step 6: Repeat.
In the past invoice finance involved a lot of paperwork and manual processing. But thanks to cloud-based software, automation, and electronic payment methods, invoice finance has been revolutionised. Additionally, some invoice finance options save businesses time by removing the burden of credit control.
Myth 2: Invoice Finance will damage client relationships.
Relationships are the lifeblood of small businesses. And some people believe introducing a third-party financer or changing payment methods, might put some strain on customer relationships. Additionally, many people may worry about how their customers perceive them (e.g. not wanting to look like they’re financially unstable).
In reality, invoice finance can benefit your customers. Due to the ability to get paid early, you can offer more favourable payment terms. Businesses need to have transparency from the start to mitigate any communication issues.
Myth 3: You must factor all your invoices.
Many business owners don’t want to get tied down with factoring all their invoices. Which is understandable if you just want to fund expensive projects. Many invoice factoring providers offer “selective customer invoice factoring”, which allows businesses to fund only the customers they want/need to.
There’s an option for every business. If you want to factor all invoices, you can. If you want to factor a single customer, you can.
Myth 4: Invoice Finance costs more than traditional loans.
Whilst there is some truth behind this, it’s important to consider the context. Invoice finance is designed to give you much greater financial leverage. The amount you pay for invoice finance is based on the level of service you require.
There are several scenarios where invoice finance could be more cost-effective. Traditional loans typically accrue interest over time, whereas invoice finance provides immediate access to cash without incurring compound interest. Additionally, invoice finance allows businesses to expand without taking on additional debt, as they’re leveraging the income they’ve already made.
Term loans require repayment of capital over the term of the loan; this is not the case with invoice finance, which is a “revolving credit” arrangement.
Myth 5: Invoice Finance is only for struggling businesses.
While it’s true that invoice finance can benefit struggling businesses, it’s not the sole purpose. The truth is invoice finance is a versatile tool that aids businesses at various stages. Both start-ups and large enterprises can use invoice finance for the many benefits it brings.
Invoice finance comes as a flexible solution that allows businesses to convert their unpaid invoices into cash. It’s a proactive approach to financial management, not a last resort. We have many clients who use invoice finance, all in different financial and growth positions.
Myth 6: You must have a good credit history to qualify.
While credit history may play a role in some cases, invoice finance tends to focus more on the creditworthiness of the business’s customers. Many invoice factoring providers rely on the value of the invoices themselves, rather than solely on the business’s credit history. Even businesses with less-than-perfect credit scores can qualify for invoice finance. The typical eligibility criteria for invoice finance are as follows:
- Engage in B2B trade.
- Credit worthy customers.
- Net turnover exceeding £50,000.
Invoice finance is more accessible and inclusive than traditional loans. Making this a great financing option for businesses of all shapes and sizes.
Conclusion:
Unfortunately, invoice finance often falls prey to misconceptions. Which stops businesses from exploring its advantages. By debunking these, it’s clear that invoice finance provides nothing but a wealth of benefits to its users. It offers flexibility, cost-effective cash flow management, and is easily accessible to many businesses.
About the Author:
John Day is the sales director at Apollo Business Finance, an invoice finance provider based in Manchester. Apollo specialises in funding businesses of all shapes and sizes with tailored invoice finance solutions.
