alternative financing methods – invoice factoring pros and cons

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Alternative Financing Methods – Invoice Factoring Pros and Cons

19.05.2014 [email protected]

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19.05.2014 [email protected] © freelancermap.com

Invoice Factoring

Freelancers, especially at the beginning of their career, are very reliant on cash flow – how much money comes in and how quickly it does so. This is a factor that can make or break businesses. One of the ways for freelancers to speed up their cash flow is invoice factoring. This article gives an explanation of what this financing method includes, how it can benefit you and what risks it often hides. If your clients take a lot of time to pay off invoices and you feel like increasing your cash flow can help your business, read on.


What is invoice factoring?

Invoice factoring is a way to get your invoices paid up to a certain percentage right away. You sell your invoices to a finance provider who will cash them out and pay you anywhere around 70 and 90 percent of their worth. After the invoice is actually paid by your client, you get the rest of the sum minus their interest rates (between 1,5% and 3,5%). Using invoice factoring means you don’t have to wait weeks or sometimes even months to get your money, but also giving up a part of your income as well. Now that we know what it is, let’s look at some other, less obvious pros and cons.


Benefits

The first advantage that we already mentioned is getting money quickly. That aspect alone brings a couple of benefits to the table. First of all, you can plan out your financial strategy more efficiently, knowing that you don’t depend on a client paying you early or late. This in turn allows for quicker investments and, in the best case scenario, rapid growth.


Benefits (cont’d)

Other than that, factoring can help you research your clients and thus avoid potentially bad ones. The firms that are willing to lend you the money will often want to look up who you work with and sometimes flat-out refuse to work with someone that they suspect can delay or not make the payment at all.


Risks

Factoring can come at a price – and no, I`m not talking about the interest fees that factoring providers will cost you. Unfortunately, factoring sometimes comes with the stigma that it is primarily used by businesses that are struggling, which doesn’t have to be the case. With that being said, the worst potential drawback is the damage it can cause to the business relationship with your clients.

Some companies will prefer the personal touch and dealing with you – for them, those preferences might be the exact reason why they chose to work with a freelancer in the first place. Others will just be straight out annoyed when a third party starts calling them with reminders to pay.


Risks (cont’d)

Last but not least, some factoring providers will want to have a say in the way you operate your business. What they see as a potentially bad client might be someone you’re willing to do the work for anyway for a variety of reasons.


Conclusion

To sum it up, factoring might be worth it for freelancers who can use the quick cash flow in a smart way to grow and nurture their business. However, you should be aware of the risks and research the agreement you’re going to have with the factoring providers before you jump into anything. Thankfully, it’s quite the competitive market and there will be a lot of offers to choose from.

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19.05.2014 [email protected]

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alternative financing methods – invoice factoring pros and cons

Economy & Finance