Today’s SMEs operate within an economic landscape that requires creative thinking to survive as traditional forms of lending, such as business loans have become harder to come by.

As more SMEs are being refused business finance by the high street banks, it comes as no surprise to see that they are seeking other routes to funding, such as invoice finance (factoring and invoice discounting) and credit cards to fulfil their business needs.

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Advantages of Invoice Finance

Poor Credit

Getting approved for a short-term business loan can be tough, even impossible if the business has a poor credit history. In this scenario, firms frequently turn to invoice finance as it can bring a number of benefits, such as improved cash flow by managing credit control and the collections process.

Longer Payment Terms

Invoice finance also provides businesses struggling with longer payment terms or late payment problems a quick cash flow boost, releasing around 90%, sometimes 100% of the value of the outstanding invoice within 24 hours.

Supports Growth

Adding to these key benefits, invoice finance is a revolving facility where new invoices received make new funding available, with the added benefit of using the sales ledger as the primary security. This type of finance can also adapt to the changing circumstances of the business so that when sales grow, the amount that can be released through unpaid invoices will also grow.

Disadvantages of Invoice Finance

Requires Commitment

In the past, smaller businesses have been put off this type of facility because they have been required to commit all or a large proportion of their debtor book to the factor of discounting company. However, providers have responded to this problem by introducing a number of products, such as selective invoice finance that brings the benefit of more flexibility by allowing businesses to choose which invoices to sell as and when they need.

Increased Administration

For resource-starved businesses, it’s worth considering that invoice finance requires more administration in-house than a credit card, and if the business doesn’t get the agreement right, this can cause problems in the longer term.

Advantages of Credit Cards

Quick and Convenient

Credit cards are a good financial tool for start-ups as they are easy and quick to qualify and be accepted for. Credit cards offer a revolving facility, therefore, the business can borrow up to the limit, pay it off and then have access to the funds again. This can make paying for goods and services convenient, make staff work-related spending easier, help cash flow and improve credit ratings, without any need for collateral.

Can Work as an Interest Free Loan

When used correctly, credit cards can help business owners to manage their finances efficiently, especially if they take full advantage of interest-free periods and balance transfer offers that operate like an interest-free loan.

Disadvantages of Credit Cards

Low Upper Limits

Credit cards are useful for smaller amounts, such as less than £5,000, for helping with short-term growth. However, having a card limit can be problematic if the business needs to make an investment that exceeds the card limit. It’s also worth noting that business credit card providers will check the business owner’s personal credit score and that this could affect the outcome of any applications.

High Interest Rates

Credit cards are unsecured and typically have high-interest rates, however, these rates are always transparent. Nonetheless, credit cards should be used wisely and with the discipline to avoid becoming trapped in a cycle of debt.

Can we Help?

If you are unsure as to how invoice finance compares with business credit cards as a source of working capital, please call 08000 24 24 51 or email info@businessexpert.co.uk for free and confidential advice from one of our professional advisers.

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