When your business hits a financial crush, it’s important not to panic and to consider all your options. Business loans are affordable and safe methods of securing funds for your business, however, not every business is capable of getting a business loan.
Banks may turn down a small business requesting a loan for a variety of reasons, such as:
Your credit history is one of the first things banks will assess when deciding whether to grant you a loan. A good credit score shows banks that a business has properly managed their debts and their personal and professional finances and has avoided bankruptcy and makes their payments on time.
However, if your credit score is bad, this can make lenders wary since it suggests that you may not repay your debts or that you may not be making well-informed financial decisions. While you can repair your credit score by getting your credit card balances under control, repairing any mistake on your credit score, and paying your bills on time—it certainly doesn’t make for a quick fix.
Weak cash flow
Banks are concerned with how much liquid asset you have, namely your cash flow. Unfortunately, many small businesses or start-ups struggle to maintain a healthy balance in their bank accounts. This can happen even when you’re a profitable business.
How long you’ve been in business
Getting a bank loan may seem like a great initial step to jumpstarting your business. Unfortunately, how long you’ve been in business may be the first thing that plays against you. A traditional bank loan with simple interest and monthly payments is mainly aimed at businesses that have been in business for two years or more.
The reason why? These traditional loans often require up to two years of tax returns to prove that you are running a legitimate, functioning business. Also, small businesses just starting out rarely have the collateral a bank likes to see to secure a loan.
Not being adequately prepared
Many small business owners are simply not prepared for the application process required by banks. You need to demonstrate your company’s success with a written business plan, financial statements or projections, tax returns, and bank statements.
If you walk in simply expecting to fill out an application and get a loan, you will be disappointed.
So, if these are the many reasons a bank may reject you, what can you do to secure the financially stability of your company when your cash flow gets choked off? This is where many businesses turn to Invoice Factoring or Invoice Financing.
Invoice Financing versus Invoice Factoring
Invoice Factoring and Invoice Financing are both financial services that can help release funds that are tied up in your unpaid invoices. This is done through a provider, such as this site, who agrees to advance the money to you against outstanding debtor balances. That being said, there are some key differences between the two.
If your business offers clients or customers extended credit terms (such as those between 30 and 90 days), invoice financing will let you use your invoices as financial proof that you can pay your lender back on the advance. With invoice financing, you will usually see up to 85% of your money upfront from the lender. Once your customer pays the invoice, you can then pay the lender back. This frees up cash trapped in invoices and allows you to get at money you can use as working capital.
Invoice financing allows you to:
- Have more flexibility, since you get to pick and choose which invoices you finance and when you do it.
- A cheaper, monthly rate that is usually between 3 to 5% of the amount of your invoices. Invoice factoring can have much higher fees.
- Retrieve the payment directly, since your business will usually deal with the customer directly.
- Maintain confidentiality, since your customers won’t know that you’re working with a financing company
It’s important to consider that invoice financing companies may not offer debt collection services, though your business may already have a department that deals with credit and debt management, which means you wouldn’t need this service anyway. Invoicing factoring companies, however, almost always have debt management services.
You’ll want to know how much you can afford to pay when considering invoice factoring or invoice financing. If you’re only occasionally financing single invoices, the setup and maintenance costs will be prohibitive. However, the credit management services that often come with invoice factoring cost as well—though that cost is often embedded into the rate. You’ll want to make sure you’re well aware of all the added costs before you select either financing option.
Invoice Factoring refers to a financial situation in which a business sells its accounts receivables (invoices) to a third party at a discount. This price will sometimes factor its receivables assets to meet immediate cash needs. Invoice factoring can also be referred to as accounts receivable factoring.
Factoring is different from a bank loan in that the receivables are sold instead of offered simply as collateral. This means you company can convert its receivables into cash for use immediately instead of waiting 60 or even 90 days for clients to pay. Invoice factoring places the time and effort of collecting the debt onto the factoring company and will give you the time to focus on running your company instead of chasing after unpaid invoices.
Invoice factoring can be a great option if you need money quickly but aren’t able to secure a conventional bank loan.
If the factoring company you have chosen is decent, they will most likely research the credit history of your customers before buying the invoice. They also want to make money and need to be confident that the invoices they’re buying are from companies that have a history of actually paying their bills.
A good company will also provide non-recourse factoring. This means that you will be protected if a client goes insolvent during the transaction period.
Invoice factoring is great for companies looking to inject cash into their business in a hurry without incurring any additional debt. By selling your accounts receivables at a discount, you’ll get money right away without having to wait on collecting. This can be a great option for staffing companies, trucking companies, distributors, and importers.