How does Invoice Finance with Business Loans Compare?

SMEs naturally gravitate towards traditional financial products, such as business loans and overdrafts to meet their funding needs. However, data suggests that almost half of SMEs have found barriers to finance, with traditional lenders frequently making lending decisions based on credit, of which higher risk business, such as start-ups, Phoenix and smaller businesses have very little.

On the occasions that businesses are accepted for a short-term loan, the lender may not fully understand the sector in which the business operates and the loan can fail to offer the flexibility needed by these fast-growth businesses. In short, off-the-shelf business financial products haven’t always been the most practical for these businesses. This has led to many business owners turning to invoice finance (factoring and invoice discounting) to secure flexible funds for improved cash flow and to make investments in future growth.

Here we compare the pros and cons of invoice finance and business loans.

Advantages of Invoice Finance

One of the considerable benefits of invoice finance is that it gives businesses access to finance as soon as the invoice is raised by releasing around 90%, sometimes even 100%, of the value of the debtor book once the invoice is issued. Invoice finance, specifically factoring, can also improve cash flow by managing credit control and the collections process, making it more likely that customer payments are received on time. Adding to these benefits, it’s a revolving facility and an extremely flexible option that can adapt to changing circumstances so when sales grow, the amount that can be released through unpaid invoices will also grow.

Disadvantages of Invoice Finance

Traditionally, SMEs have been put off invoice finance because they have been required to commit all or a large proportion of their debtor book to the financial provider. However, this is no longer the case as a number of new products have been introduced, such as selective invoice finance that brings the considerable benefit of more flexibility by allowing businesses to choose which invoices to sell as and when they are required.

That said, invoice finance still requires more administration in-house than a business loan and if the business doesn’t get the agreement right, this can cause problems in the future and can be difficult to solve.

Advantages of Business Loans

Businesses naturally gravitate to the banks and short-term business loans are one of the most traditional routes to finance available and frequently the option that business owners consider first. However, it is vital to understand that business loans are only likely to be accepted if the business has a sound credit history and the owner can show that he or she has a viable business model. One of the main benefits of business loans is that they have a fixed-rate of interest, albeit a high one, which means that repayments will remain the same every month for the next 12 months to 10 years, depending on the repayment terms.

Disadvantages of Business Loans

However, business loans can be expensive and inflexible as the business borrows a lump sum that has been agreed with the bank. It may subsequently become apparent that not all of the loan is required or that the business needed more than it initially thought. This can be a tough one to solve.

If your business is one of the thousands of small businesses that have been refused a loan by a high street bank and would like to know more about invoice finance to plug the cash flow gap or raise funds for future growth, please call 08000 24 24 51 or email for free and confidential advice from one of our professional advisers.