If you bring us a contract with a better offer, we guarantee to either beat that rate or pay you $500.

Pros and Cons of Invoice Discounting

11 Pros and Cons of Invoice Discounting

Pros and Cons of Invoice Discounting

Invoice Discounting (ID) is a financing method where companies sell their commercial invoices at discounted rates to banks or other financial institutions.

The bank or factoring company then lends the money back to the company at that discounted rate on the unpaid invoice. This funding method allows the company to pay its bills faster, thus eliminating any potential cash flow problem and not having collection hassles on any late payment or bad debt.

Invoice discounting has become a common practice for businesses across industries. ID accounts for over $1 trillion in annual revenue, thus dramatically increasing any company’s cash flow situation.

Invoice financing companies offer discounts ranging from 5% to 30%, depending on the invoice amount.

The benefits of using an invoice discounting company are numerous. For one thing, it’s much easier than traditional loans because there is little paperwork involved with debt factoring.

Also, using an invoice discounting facility is fast and straightforward. You don’t need to wait months before you can start receiving payments from the invoice factoring companies. Lastly, you will be able to use your funds from the invoice discounting arrangement immediately without waiting for them to clear first.

However, some say that ID is a financing option only useful for large corporations because they can afford to take out loans from multiple lenders. Smaller businesses often struggle to secure funding from various sources. Don’t let this be a barrier to trade.

We’ll discuss the benefit of discounting and the strategies you need to get the most significant help from an invoice factoring company.

How does invoice factoring work?

The process begins when a business sells its accounts receivables to a factor. An invoice factor is a third party financing company that purchases sales invoices on behalf of various clients, and factors are typically intermediaries between buyers and sellers.

Factors purchase invoices based on credit risk. If a customer has a net 30 or 60, the factor will assume responsibility for paying the invoice. Once the factor assumes responsibility for the payment, it collects payments from your customers for a factoring fee.

How much does invoice factoring cost?

The invoice factoring service charges fees for purchasing invoices, and these fees vary depending on the size of the client’s account. Typically, the invoice finance facility charge anywhere from 1-3% per transaction.

However, this percentage may increase if the amount financed exceeds certain thresholds. For example, if a factor buys ten unpaid invoices worth $100 each, it would charge one to three percent of 10 X $100. If the total value of the outstanding invoices purchased by the factor was more than $500,000, the fee could be as high as 5%.

In addition to buying invoices, factors, as your finance company, also collect payments. Effectively they operate as a credit management system for your business.

They do so through two methods:

Direct Deposit: Most factors use direct deposit to receive payments from customers. With direct deposit, funds are deposited directly into the factor’s bank account.

Electronic Funds Transfer (EFT) – Some factors accept EFT payments. An EFT payment is processed using electronic transfers, and it works like sending a check electronically.

What types of invoices can I finance with invoice factoring?

Factors buy any type of invoice. However, specific invoices are more likely to be accepted than others. Here are some examples:

  • Payroll/Employment
  • Accounts Receivable
  • Factoring
  • Sales Tax Refunds
  • Other Business Expenses


After selling my invoice, how long does it take to get paid?

Once you sell your invoice to a factor, the payment term is from 3 business days to 30 days before you start receiving payments. Your factoring company usually provides a timeline for how quickly they expect to receive payments and the payment terms.

Is invoice factoring a loan?

No. Factoring or accounts receivable financing is not considered lending like a traditional bank loan. Instead, it is a sale of an outstanding invoice. You can even sell a selective invoice to a factor, and the factor then finances them.

The invoice finance provider repurchases the invoice value at the discounted price. The factor effectively bought your invoices at a lower rate than what you originally sold them, making this a viable solution for immediate access to capital and business cash flow.

Pros & Cons of Invoice factoring

The Pros of Invoice Discounting:

The advantages of Invoice Discounting are mainly Fast Cash Flow (Liquid Cash) – When you invoice your customers, you’re essentially selling them an asset. Once they receive it, they have no choice but to pay you. If they don’t pay on time, you can ask your lender to charge them interest until they do.

  1. Reduce Debt: It’s easy to rack up debt when running low on cash. By taking advantage of discounts offered by your lender, you’ll be able to reduce your overall debt.
  2. Better Credit Score: Your credit score will improve as long as you make timely payments. With the help of your lender, you should be able to keep your balance lower than it would otherwise be.
  3. Eliminate Debt Collection – When you sell your invoices, you eliminate the need to pay collectors or the additional cost of attorneys to collect bad debts. Your lender sends you the money as soon as your customer pays them.
  4. Get Paid Faster: Since your customers have already agreed to pay you in full, they won’t have much reason to hold back. You’ll get the money immediately from the receivable financing, thus speeding up your access to cash.

Cons of Invoice Discounting:

  1. Start-ups: The disadvantages of invoice discounting are lenders are not always open to new businesses. Many small business owners are nervous about approaching traditional lending sources because they think they won’t approve of them. However, this isn’t always true. Lenders are more likely to accept new clients if they know you’ve been doing well with previous clients.
  2. Larger Companies Can Take Advantage of Multiple Sources: While smaller businesses may not be able to access multiple lenders, larger ones can. They can use their relationships with different lenders to negotiate better deals.
  3. Denied by Bank: Getting a bank loan for your company may not surprise you, as banks aren’t always willing to lend to new enterprises. So, we consulted with experts on how to acquire a loan without a bank. Find out how below.
  4. Cost: Invoice factoring might be more expensive than other kinds of finance, despite allowing you to acquire cash rapidly. In general, factoring fees range from 1% to 5%.
  5. Availability: There are some business structures where invoice factoring does not function. You won’t have any invoices to convert to cash if your company doesn’t employ invoicing to collect clients’ payments.
  6. Giving up control: If you have an unpaid invoice in your possession, you can contact your customer to complete payment under your payment terms. However, when you sell invoices to a factoring company, you give up control of the collection process to a third party.
  7. Issues when a customer does not pay: You may be obliged to buy back the invoice if the recourse factoring business is involved. If a customer fails to pay, the non-recourse-factoring service will bear the loss, and you will not be held liable.

Here’s what they said.

How To Get a Loan Without Going Through a Bank?


Alternative to bank lending

  1. Apply for An Unsecured Personal Loan

Unsecured personal loans are typically easier to obtain than secured loans. You don’t need collateral to apply for one, which means you can qualify for one regardless of your credit history.

You can also try to apply for an unsecured personal loan online. The application process usually takes less than 5 minutes, and you can complete it using a smartphone.

  1. Use Crowdfunding Sites Like Kickstarter and IndieGoGo

Crowdfunding sites like Kickstarter and IndieGoGo allow individuals to fund projects in exchange for rewards. These reward packages can include anything from physical goods to travel experiences. This strategy can be a good business finance option if you have something unique. Most people who want to start a business need capital.

  1. Ask Friends or Family Members for Money

Many people turn to friends and family members for financing instead of banks. This approach is prevalent among startups since they often lack collateral.

  1. Borrow from Smaller Banks

Smaller banks tend to offer better terms than more prominent institutions. Some small community banks specialize in providing loans to startups.

  1. Consider Alternative Funding Options

Alternative funding options include equity-based investments, microloans, and peer-to-peer lending platforms. Equity-based investments involve giving investors shares in your company in exchange for a portion of its profits. Microloans are short-term loans between $25,000 and $50,000. Peer-to-peer lending enables you to borrow money from fellow entrepreneurs.

  1. Look into Government Programs

Some government programs exist specifically to help small businesses get started. One example is the SBA (U.S. Small Business Administration), which offers low-interest rates on loans. Another is the WOSB program, which provides grants to women-owned businesses.

  1. Try Out Different Types of Loans

There are many funding options available, including term loans, revolving lines of credit, and commercial real estate loans. Before asking for a loan, you should thoroughly investigate the pros and cons of each option.

  1. Think About Your FICO Score

Your personal credit score and history will play a role in whether your loan request gets approved. Unfortunately, you’ll likely need to pay more for your loan if you have bad credit. However, if you have good credit, you may be able to get a lower rate.

  1. Don’t Forget Other Factors When Applying

Your business plan, revenue projections, and other factors should be your loan decision.

  1. Pay Off Debt Before Seeking Financing

Consider paying off any outstanding balances before seeking financing if you have debt. It could save you time and money down the road.

  1. Be Prepared for Delays

There’s no guarantee that you’ll receive approval right away when you apply for a loan, and some lenders take weeks or even months to review applications.

  1. Know What Type of Loan Is Best for You

Think about your needs before deciding what kind of loan to seek out. Are you looking for a short-term bridge loan? A long-term line of credit? An installment loan?

  1. Keep Track of Payments

Once you’ve received your loan, keep track of your payments. That way, you won’t miss any due dates and avoid late fees.

  1. Monitor Your Interest Rate

It’s essential to monitor your interest rate because it can change over time. Make sure you know how much you’re paying before making a final decision.

  1. Shop Around to Find the Best Rates

Compare different lenders’ rates to find the best one for your situation.

  1. Ask Questions

Ask questions when you meet with lenders. They want to make sure you understand their products and services.

  1. Get Help with Documentation

You may need to provide extra documentation when applying for a loan. This paperwork includes personal financial statements, tax returns, and bank statements.

  1. Understand Repayment Terms

Repaying a loan requires sticking to strict repayment terms. Otherwise, you risk incurring additional costs.

  1. Consider Alternative Funding Options

Other alternatives include equity-based investments and microloans. These alternative options may not be suitable for everyone, but they may be worth considering. Personal savings, and even borrowing against future profits are just some of the ways to raise money.

  1. Hire Someone to Do All the Work

Hiring an accountant or bookkeeper can speed up the application process. This person can also help you prepare documents required by lenders.

  1. Choose Wisely

Don’t choose a lender just because it’s convenient. Look at their reputation and customer service ratings first.

  1. Avoid Bad Lenders

Avoid borrowing from companies that don’t offer competitive rates or are challenging to work with.

  1. Know How Much Money You Need

Before taking a loan, make sure you have enough money to cover all of your expenses.

  1. Take Advantage of Tax Benefits

Tax benefits can reduce your monthly payment amount. Speak with a professional to learn more.


 What Are Some Alternative Funding Options?

Alternative Funding

Businesses today have a plethora of possibilities for obtaining capital.

Here are some examples:

Equity-Based Investments

A company might sell its assets in exchange for shares of stock. If the company is successful, then the value of those shares will increase. In this case, the company receives funds without having to borrow money.


A business owner might obtain a small business loan through a local bank or non-profit organization. This type of loan is typically smaller than traditional loans, and however, it comes with higher interest rates.

Small Business Administration (SBA) Loans

The SBA offers low-interest loans to entrepreneurs who qualify, and it helps these borrowers get started and grow their businesses.

Unsecured Business Loans

If you own a business that isn’t generating revenue yet, you might consider borrowing against future sales. Unsecured business loans come with higher interest rates.

Merchant Cash Advance

This option allows a business to receive immediate funds, and the borrower pays back the loan plus interest after batching daily sales.

Home Equity Line of Credit

If a business has a good credit rating, it might consider using a home equity line of credit as a source of financing. The home equity line of credit, or HELOC, enables you, the owner, to borrow money against the value of your house in the near term.


How Can I Improve My Small Business Financing Situation?

To improve your financing situation:

  1. Start by asking yourself what you need.
  2. Look into all your options.
  3. Do your research before making any decisions.
  4. Talk to your banker

Talk to your banker about your present financial situation first. Find out whether there are any options for reducing your debt with them. To assist you in getting out of debt, they should be able to provide you with some suggestions.

Review Your Loan Documents

Review your loan documents carefully. Make sure that you understand everything written in the agreement. Also, make sure that you know when to expect payments.

Pay Off High-Interest Debt First

Pay off high interest debt first. For example, if you have a $10,000 car loan, pay off the principal first. After paying off the principal, focus on paying down the remaining balance.

Consider Consolidating Debts

Debt consolidation may be an option for you. You may be able to save money on interest by doing so.

Check Out Other Types of Debt

You may want to explore other types of debt besides personal loans. These include lines of credit, home equity loans, and mortgages.

Don’t Forget About Retirement Savings

Many people put retirement savings last on their list of priorities. But, they shouldn’t forget about saving for retirement. If you fail to plan, you won’t have much saved for retirement.

Shop Around for Better Rates

Compare different lenders’ rates to find the best one for your situation.


Best Strategy to Apply for a Small Business Loan?

Best Strategy to Apply for a Small Business Loan?

Applying for a small business loan takes time. Follow these 5-steps to ensure you apply successfully:

  1. Create a budget. Make sure you know how much money you’ll need before you start looking for financing.
  2. Find out what types of loans are available. Most banks offer several different types of loans.
  3. Determine which type of loan makes sense for your situation.
  4. Prepare all necessary paperwork. Include copies of relevant documents like your credit report and proof of income.
  5. Submit your application. Make sure you can answer questions regarding your company’s operations and financial status during the interview process.

Don’t assume that one lender is better than another. Instead, shop around for the best rate. You might find that your current lender isn’t offering the lowest rates.

In conclusion

An invoice-based financing solution is a beautiful method to stabilize cashflow, manage operational needs, and plan for development without incurring additional debt.

A company may be concerned about revealing this to its customers if it uses an invoice financing service. However, we’ve found that this is rarely a genuine concern for your customers.

Managing cash flow through invoice financing and other products is now widely accepted as an innovative and efficient organization strategy. With many firms finding it difficult to secure bank financing, exploring other financing sources is a good idea.

When submitting a bid for a significant project, our clients frequently request a letter of support from us. Invoice payment facilities like ours ensure that their clients’ businesses can stay afloat while they await payment.

If you need more control over your business’s finances, a selected invoice finance facility could be a perfect solution for you.



Support 12

Mark J. Kane, Founder & CEO of Sunwise Capital, is a distinguished entrepreneur with over 16 years in business financing. Beginning as a psychologist, he quickly became a trailblazing Hospital Administrator. Mark has built multiple ventures, notably accelerating a startup to $18M within months. His transition to Sunwise Capital stems from a deep-seated desire to empower business owners with strategic financial solutions. Recognized for his expertise, Mark's leadership at Sunwise Capital reflects his commitment to fostering business growth and success. about the author.

Take Your Business Further With A Loan From Sunwise Capital