Business loan

When to choose invoice financing over a business loan


For new and established businesses, managing cash flow can be a challenge. And if customers get into the habit of delaying payment, you may find yourself stuck as a business if you don’t run into other issues later.

Invoice financing works around this problem by allowing you to borrow against the value of unpaid invoices. The amount of funding available increases as the number of invoices increases and decreases (with associated costs) during quieter times.

Octet supply chain manager Joe Donnachie says invoice financing may be suitable for businesses in a variety of industries – including transportation, labor leasing, and manufacturing – but many remain in the business. ignorance of what he has to offer.

“It is not uncommon for fast growing businesses to ignore that invoice financing is a viable option for them, as it can often get lost in the myriad of other financing solutions on the market,” he said. he declares.

So how do you know if invoice financing is better for your business than a traditional loan? Here are a few things to keep in mind.

Is flexibility a priority?

Founder and CEO of Timelio, Charlotte Petris believes that companies don’t have to choose one over the other, but there are times when invoice financing may be the most appropriate option.

“A business loan is sometimes used in conjunction with invoice financing, but unlike invoice financing, a loan is capped and the loan amount does not fluctuate with cash flow requirements,” she said.

This can sometimes hold back businesses, especially those experiencing seasonal demand and those that are (or could be) in a high growth phase and need additional cash flow.

“For these businesses, it can be difficult to accurately forecast cash flow requirements and having a funding facility that is flexible and evolves with the demands of the business,” said Petris.

What about security?

When you take out a loan from a traditional lender, you will be offered either a secured loan (which requires you to put property, vehicles, or inventory as collateral) or an unsecured loan (which tends to be matched). higher interest rate). .

Donnachie says warranty requirements can be an issue for businesses without physical assets, such as service businesses or those that are just starting out.

“Depending on where your business is at, you may not have the assets available to do this. Even if you do, taking out a loan may not be the best decision for your balance sheet, ”he said.

“Invoice financing is an attractive and flexible alternative. By using your receivables as collateral, you can quickly access valuable cash without having to offer collateral and keep your balance sheet.

The bottom line

Financing invoices is a way for businesses to reduce the long delays between the sale of a product or service and the receipt of payment. According to Donnachie, invoice financing may be suitable for businesses that have:

  • Long customer payment terms.
  • Seasonal sales cycles, in which cash flow fluctuates but costs remain constant.
  • Strong demand but limited cash flow.
  • A lack of physical assets to provide as collateral.
  • A desire to keep a healthy balance sheet.
  • A desire for a discount for early payment.

For more information, browse our guide to financing small business invoices.