There is no denying that small businesses and startups often find it difficult to securing a loan. It is because banks and finance lenders are uncertain when it comes to lending money to the newly established businesses because they do not have sufficient assets or income. Not only this, lenders require proofs of business viability. And that requires main operations to be in the business for a certain period before banks hand over the money.
Because of these conditions, most of the small businesses have limited cash-generating options. Invoice financing, in this regard, is one of the available options that businesses can often overlook. Invoice factoring, without a doubt, is a great way, particularly for small businesses to generate cash. They can turn their unpaid customer invoices into cash using invoice factoring. The option is best for the businesses that do not have direct accounts receivable financing and need good cash flow to run operations. Before plunging into the details of how small businesses can capitalize on invoice factoring, let’s understand what it is.
What Is Invoice Factoring?
Invoice factoring is often confused with a traditional loan. However, it is a completely different phenomenon. A business sells its invoices to a factoring company at a discount rate to get a lump sum amount of cash. The factoring company that owns the sold invoices gets its payment back when customers pay for the goods and services. Typically, this time may extend from one month to three months.
For instance, you’re an owner of hardware store that sells goods to different businesses and creates a $10,000 invoice. Your customers agree to pay off his/her invoice in 40 days. However, you need cash payment to make staff payments or purchase inventory. You need fast cash to overcome cash shortfall.
Here, you have an option to approach traditional lenders such as banks to take loan, but it is easier said than done. That is to say, to get your loan application approved, you will require physical assets such as properties, personal and collateral credits that bank could sell or use if you fail to payback. Even if you qualify for the loan, you will have to wait at least two months to receive the cash payment.
Funding Challenges for Small Businesses
In addition to facing difficulties in accessing business line of credits or capital loans from the banks, small businesses often encounter a number of funding challenges. The key factors that cause these challenges are lack of profits, debts, and short time span in business. The financial condition of small businesses depends on cash flow. That means cash burn rate is the financial metric that lenders track for fast-growing businesses. Without any reliable credit facility or safety, if cash flow of any business runs out, it fails to make progress. A recent survey has demonstrated that approximately 82 percent of startups don’t excel due to their poor cash flow.
Many entrepreneurs invest a significant amount of their personal income in the businesses. They try all their avenues and resources to strengthen and manage cash flow. It could even mean that business owners not paying to themselves. Plus, when there are cash flow problems in any business, it may jeopardize its stakeholders. Employees may have to compromise on their pay rolls.
Some invoiced clients take advantage of startups by negotiating their position. They agree to wait for longer period as they receive an interest-free loan when it comes to dragging out payments. Although this helps them generate good cash flow, it doesn’t benefit your cash flow. As a business owner, you do not have negotiating power when it is about setting payment terms. So what solution do you have? Here comes the role of account receivable factoring that you can use to capitalize business funding. Let’s see how it can help small businesses.
How Invoice Factoring Helps Small Businesses Generate Funds
As mentioned earlier, account receivable factoring or invoice factoring is an efficient cash management system. Technically, the innovative funding option levels the payment field with the invoiced customer who take more time to make payments. What makes factoring option best for the small businesses is its easy money raising method. It allows startups to generate cash without any incurring debt.
Key takeaways of capitalizing on invoicing factoring for small businesses:
Fast cash: account receivable factoring provides fast working capital that small business needs to cover huge funding gaps. These gaps are because of slow-paying customers.
Better cash Flow: Through invoice factoring business owners can retain potential customers on long-term payment basis and also can improve cash flow to grow business.
Easy access: with account receivable factoring, business owners can get the finance for their companies easily. These companies or small set ups are often struggle to qualify for capital from sources like traditional loan companies or banks due to limited operations and poor credit history. Although creditworthiness of the customers matter, factoring companies, typically care about invoices value that a business owner wants to factor.
No need of collateral: account receivable factoring doesn’t need collateral as it is an unsecured financing. That means small business owners do not need to show assets like inventory or real estate that lender seizes if business owner fail to repay.
Invoice financing without a doubt has become one of the increasing business funding sources. Many small businesses are turning to this funding solution while factoring companies are willing to cater the customers. Initially, only large corporation used to take benefit from factoring receivables with their monthly invoices over $50, 000. However, the scenario has been changed with more factoring companies offering least monthly minimums to attract small business customers.
Overall, invoice financing is an effective way to keep your business cash flow running. It provides immediate finances in the form of advance amount to the invoiced customers. Thus, the funding option is reliable in terms of capitalizing invoice factoring.
If you're interested in learning more about Porter Capital and the financial services we offer to businesses, please fill out the form below and our advisors will be in touch. . .