Collecting outstanding payments against overdue invoices and efficiently managing the cash flows can be a significant challenge for business owners. Yet, depending on a business loan may not be the right solution to tide over such situations. In many cases, invoice financing, where one can borrow money against unpaid invoices, maybe a better option than a business loan for various reasons. Especially in seasonal businesses, or businesses where cash flows are unpredictable, it may be difficult for an entrepreneur to bear the burden of a business loan. That is because business loans, both secured and unsecured, charge high high-interest rates. Also, business loan caps and sizes do not change in response to cash flow fluctuations.
For business loans, banks and financial institutions often insist on tangible collaterals, like physical assets. Those in the service-based industries and those setting up a new business may not have such physical assets. Also, in some instances, delayed payments from demanding clients can hamper the cash flow of a fast-growing company. In all of these cases, invoice financing, where one can use the invoices as collateral to get a cash advance, helps an entrepreneur tide over cash flow issues and manage the financial concerns much more efficiently. Thus, invoice financing works exceptionally well for most SMEs as they allow an entrepreneur to convert invoices into working capital to meet imminent needs without burdening the balance sheet.
Business loans have more extended repayment periods and are thus best suited to meet capital expenditures, whereas invoice financing helps you tackle short-term cash flow issues. It is more suited as a financing option where the customer payment terms may be inordinately long, or some customers delay payments. Thus, invoice financing is suitable to tackle unanticipated cash flow problems and where the entrepreneur lacks the collateral that banks or financial institutions insist on. Unlike in factoring, where the entrepreneur sells the invoices to a factoring company, under invoice financing, the responsibility of collecting outstanding payments on the invoices still rests on the business owner.