Updated: Sep 14
As a business expands, it often finds itself needing more financing for multiple purposes such as marketing, meeting payroll, and other similar expenses. Some businesses are financially strong, so they get loans from the banks to increase their credit with ease. However, not all startups qualify for traditional bank loans. They need less traditional financing methods to avoid additional debt to the balance sheet. Banks offer limited leverage to small businesses, which can hurt the business in many ways.
Invoice financing, in this regard, is an innovative financing solution that helps small businesses stabilize their cash flow. The funding alternative unlocks the cash sitting in the form of unpaid receivables. Invoice financing is also called accounts receivable financing. The process typically treats invoices like collateral that businesses sell to different factoring companies. The businesses receive the funds in advance with the sold invoices. This amount of capital grows with the business.
As long as small businesses have invoices that they can factor, they can receive funding. That is one of the reasons accounts receivable financing is gaining popularity as it is one of the reliable sources of working capital for small businesses. However, before you try funding your business with invoice factoring, it is important to know how this alternative financing option is better than the bank loans. Below we will quickly go through the reasons explaining why, as a small business owner, you should prefer accounts receivable financing to a traditional bank loan.
Why is Invoice Factoring the Better Option than Banks Loans?
Quick, Easy, and Convenient: One of the main problems that make qualifying for traditional loans is the strict requirements of the banks. Even a small loan requires heavy paperwork, involves lengthy application processes, and complex approvals. To get simple loan approval, a business owner may need to wait several weeks or months until the banks make its decision. What makes it even worse is that there is no guarantee you will get the loan or not after getting through the process. Invoice factoring, on the other hand, is known for its easy and convenient access. Factoring companies release funds almost immediately. This helps small businesses increase their cash flow quickly. And if you work with a top lender, you can receive funds in less than twenty-four hours for your business.
Better Cashflow: Invoice factoring is one of the predictable sources of cash when it comes to comparing it with bank loans. That means when you factor invoices for cash flow, it creates great liquidity. Businesses need improved cash flow to manage the expenses in time. Plus, they use the additional capital to avail more opportunities for better business growth and increased profit margins, without creating debts.
No Debts on Funding: The burden of repaying the loans, including interests and debts is what makes this option unappealing. Bank loans (if you somehow get them) come with hefty interests to be paid by the loaner. Invoice factoring alternatively doesn’t in-debt you when you take capital funding from a factoring company. Since you leverage the future invoices that result in improved cash flow and decreased accounts receivables, there is no burden to repay the loans. That means small businesses doesn’t need to make principal, interest, or payments as they pay back the amount after collecting invoices.
No Limitations: Traditional bank loans have set limits for maximum amounts that business owners can borrow. Once you have reached the set limit that the bank had approved initially, you have to re-apply for getting additional funds. However, the cash amount you receive through invoice financing depends on the volume of your business sales. The more sales your business makes, the more invoices will be factored. Also, access to cash increases through receivables as the volume of sales grows.
Invoice Factoring is Cost-Effective: Typically, bank financing is considered less expensive, but accounts receivable financing contains many services that help businesses reduce administrative costs. Fees generally include services like credit health investigation of the customers, receivable collection, and credit limit determination. With the completion of these tasks, factoring companies create operating efficiencies to save money for the business owners. Besides this, businesses can finance as per their needs as there is no commitment to capital financing. Bank loans, using the same perspective cost you much more when loan rates, conditions, and terms are factored.
Less Risk Factor: One of the reasons why small businesses find lending money through traditional loan is difficult is lack of credits. Banks require businesses to show their assets (business and personal) as guarantee or collateral. In contrast, invoice factoring does not need any personal guarantee when it is about lending money. In short, there is no need to risk personal assets for your business finances.
What is the Cost of Invoice Financing?
Although invoice financing can be the perfect financing option for your business, it is important to be familiarized with the costs it might involve. Consider the following things to get yourself fully prepared;
For the invoice factor, it is possible that you lose some amount of profit
As there are fewer book debts as security, you might not consider obtaining other funding options
When businesses become reliant on their smooth cash flow, it becomes hard to use other funding options.
In some cases, invoice factoring has higher fees as compared to bank loans
Why Should You Prefer Invoice Financing to Bank Loan?
Bank loans are a good option if your business already has smooth cash flow and collateral that is necessary to get financing approval from the bank. But the startups that do not have sufficient business experience and have a poor credit history accounts receivable financing is the better option. The benefits of invoice factoring outweigh the advantages of banks loans, especially when using a well-reviewed and established company like Porter Capital.
Why Invoice Factoring is Better than a Bank Loan for Small Businesses
In simple words, invoice factoring is a smart funding alternative for businesses with a small setup. They conveniently provide capital to help businesses grow and manage expenses. Thus, this alternative lending option provides liquidity that is essential to expand the business.
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