Cash flow is a priority for most businesses. When customers are slow to pay for the products or services they purchase, the impediment caused by a lack of money can affect virtually all aspects of business operations. In order to stay in business, it’s essential to manage cash flow, particularly with slow-paying customers.
When cash flow issues arise, businesses in need of capital must consider the options of bank financing or a commercial overdraft.
But there are several reasons why these options may not work for your business and why invoice factoring is a more attractive alternative. These reasons are motivating more and more B2C and B2B companies to look at invoice factoring as a key resource in their cash-management strategy.
Invoice factoring and bank financing
“Technically, invoice factoring is not a loan,” notes financial writer Steve Nicastro. Instead, businesses sell their discounted invoices to an invoice factoring company and receive a lump sum of cash in return. As a result, Nicastro adds, “You can keep loyal customers on longer payment terms,” which in turn “can improve your cash flow and help grow your business.”
Bank financing is certainly an accepted strategy for business owners in need of cash. But the prerequisites for a loan—as well as the debt incurred—may be too great a hurdle to surmount, particularly for startups or other small businesses still struggling to break even.
The lending market is a consistently tough nut to crack. Not only is obtaining loan approval a challenging process, but you can jump through all the hoops and still not get sufficient funds to meet your cash flow needs. You also have new debt to add to your balance sheet, debt that incurs monthly payments until you’ve repaid the loan in full.
By contrast, with invoice factoring, there’s no nerve-wracking delay while you wait to see if you qualify for a loan, only to find out later that your credit or collateral has been deemed insufficient. Invoice factoring companies generally focus on the quality of the invoices you wish to factor (and your customers’ credit worthiness)—not your company’s credit history.
So as opposed to an approval process that drags on for weeks or months, cash from invoice factoring is usually available within 24 to 48 hours.
Maintaining a steady cash flow as a result of invoice financing means:
- You don’t have to put day-to-day operations on hold.
- You can continue to pay your employees on time.
- You can even pay yourself on time.
- You can focus on acquiring more customers and growing the business.
These are powerful incentives to consider when weighing the benefits of a traditional bank loan versus invoice factoring.
Invoice Factoring vs. Commercial Overdrafts Secured by Real Estate
Businesses seeking capital to restructure or expand operations can apply for credit from a bank based on the value of their commercial or personal real estate holdings. But would-be borrowers often find themselves stymied by a bank’s rigid lending criteria and the fluctuating value of the real estate used as collateral.
The hurdles related to commercial overdrafts include:
- A lengthy paperwork and property valuation process
- The rise or fall of value in real estate holdings
- A lower lending-to-valuation ratio
- The need to demonstrate a dependable history of debt payment
Each of these obstacles can be overcome, given enough time, resources and patience. For many businesses, however, too long a delay in securing new capital can damage present-day operations and result in delayed shipments to customers, impaired employee morale and continued difficulties in paying their own bills. Too long and complicated a lending process can threaten a company’s existence.
It’s a different story where invoice factoring is concerned. First of all, a business isn’t required to put up real estate or commercial property as collateral. Once again, financing depends on the value of the invoices. If value can be shown, cash may be released in one or two days.
Similarly, there are no concerns related to rising and falling real estate values. Using invoice financing to fund operations can continue indefinitely, as you sell invoices to the factoring company. (This can also result in even greater amounts of cash to help your business grow.)
As with traditional bank loans, commercial overdraft approval isn’t possible without filing a detailed application and producing copies of property valuations and certificates of title, as well as bank statements, business financials and personal tax returns. In some cases, you must also submit a detailed business plan and projected cash flow.
The invoice factoring process is much simpler:
- Meet with an invoice factoring representative who evaluates your outstanding invoices and guides you to the most effective factoring service.
- Fill out an application (usually within 15 minutes or less).
- Move forward after a speedy process of information.
- Receive a cash advance of as much as 96% of the total amount of the invoice to your business.
- Spend the money as you deem most appropriate (the factoring company has no influence in this area).
- Upon receipt of payment for your clients’ invoices, the factoring company deducts its fee and rebate difference, then delivers the balance to you.
For all of these reasons, invoice factoring should be seriously considered as a solution to your cash-flow issues. As noted by Finextra, an independent newswire reporting on the worldwide financial technology community, factoring “is a popular cash-management tool and is used by businesses in every industry where long receivables are a part of the business cycle.” You can take a look at great information for all the industries that use factoring here.