In the past, when small business owners had a stockpile of unpaid invoices and needed cash infusions, some of them looked to invoice factoring companies for help. They’d end up selling a chunk of those unpaid receivables in exchange for a portion of their total receipts. Money in the bank, cash crisis averted.
Not so fast.
While factoring can certainly help you bridge cash gaps, there are a number of reasons this type of financing is overrated.
4 Reasons Invoice Factoring is Overrated
It’s true invoice factoring companies can provide the money you need to get out of a pinch., but beware that this form of financing can be prohibitively expensive. In addition to factoring rates, be prepared to stomach application fees, credit check fees, processing fees, and more. All told, you may end up having to forego upwards of 20% of your revenue if you choose this route.
When you sell your receivables to an invoice factoring company, your customers end up paying that company—not yours. That means they’ll be privy to the fact that your small business is short on cash. That’s probably not the best look for a business that’s trying to grow.
When you work with an invoice factoring company, you give up at least a little control over your small business—particularly if you’re forced to sign a contract. For example, the factoring company may determine some of your customers aren’t creditworthy enough for you to continue doing business with them. Do you really want someone telling you how to run your company?
Because invoice factoring companies only allow you to sell your existing invoices, invoice factoring is limiting. You can’t get more money than the fraction of your invoices the company will pay. Invoice factoring companies absorb a huge chunk of your receivables, so you’re probably better off looking elsewhere for help.
Invoice factoring isn’t all it’s cracked up to be, but the good news is you can use an invoice financing service like Fundbox to solve your cash flow problems. You won’t have to fork over a ton of money or give up control of your business, and your customers will never find out. Learn more here.