As your business grows, you might find yourself in need of additional financing for meeting payroll, purchasing equipment, expansion costs and covering other unforeseen expenses. This quickly leads you to one of the most important questions to ask: how to fund your business? With more options available than ever before, trying to choose the right cash solution can feel overwhelming. Every business has unique financing needs, and not all funding is created equal.
Which Funding Option is Right for Your Business
If your business has a long history of favorable cash flow and profits, you will have a better chance of securing a bank loan. However, if your business is new with no financial history or credit, traditional lending options will likely be out of reach. More and more businesses today are turning to less traditional methods of financing because they are simply a more attractive option. For many companies, bank loans simply do not make sense.
A traditional bank loan gives you access to capital to invest in your small business. In the typical loan structure, the lender will give your business money, which you must then pay back with interest over a predetermined period of time. Certain details of your business – credit score, time in business and available collateral – all play a role in determining whether you qualify. Banks offer little leverage to meet additional borrowing needs, while also adding more debt to your balance sheet. In short, this funding source can end up hurting more than it helps.
Invoice factoring is an alternative financial tool that helps businesses secure and stabilize cash flow. It allows your business to use its unpaid receivables to generate quick capital. The process involves your business selling its invoices to a factoring company (the factor) at a small discount. With each invoice sold, your business receives the cash in advance. Factoring provides fast funding when you need it most – without adding a burden of debt. It also serves as an unlimited source of working capital; your line of credit grows as your receivables grow.
So, how do you know whether a bank loan or factoring is right for your small business? Take a closer look at the benefits and differences between each option – factoring vs. bank loans.
Application Processing Times
After completing all the necessary paperwork, the approval process with a bank can take months – time a rapidly growing business simply does not have. Factoring companies, on the other hand, are known for processing applications and giving approval in as little as 24 hours. Your business can start funding receivables and have cash on hand within just a few days.
Approval and Setup Process
Approval for a bank loan and rates is highly dependent on your business’ operational and credit history and collateral, which makes it incredibly difficult for startups to obtain traditional funding. Factoring companies are more interested in the credit strength of your customers, since it is their invoices they are purchasing. If your business is new, with no collateral or established credit, factoring provides quick access to funds.
Funding Potential
The funding potential of a traditional bank loan is capped by banks. Once you have been approved for a loan or line of credit, they are very difficult to change. Requesting an increase will lead to a renegotiation process that can take weeks, or even months. Invoice factoring is more flexible and is designed to grow with your business. As your accounts receivable grow, so does your line of credit.
Loan Covenants
Bank loans and lines of credit often involve a loan covenant. Essentially, loan covenants require the borrower to fulfill certain conditions or forbid the undertaking of certain actions. For example, a bank might require that your business maintain a particular debt-to-asset ratio. If these covenants are broken, the lender can demand payment in full. Invoice factoring, on the other hand, is not a debt. The factor is giving you money your business has earned and is waiting to be paid. Factoring not only allows you to avoid debt, but also bypass loan covenants that take away control over your business operations.
Additional Services
If you are able to secure business funding through a bank loan, the assistance stops there. The best factoring companies provide a range of back-office services, like customer collections, checking payment progress and free credit analysis. These services provide value beyond the working capital you receive, helping you streamline your collections process and build strong relationships with your customers.
In your search for financing, make sure you ask yourself which option provides the immediate capital you need, while also protecting your business’ long-term financial health. From long-established companies to startups, invoice factoring is an ideal option to manage cash flow crunches without taking on more debt. Ultimately, what matters most is choosing the option that best suits your specific business needs.
Would you like to learn more about how invoice factoring works and how it can help your business grow? Contact our cash flow experts at Bold Business Capital to get started.
