When business is growing but the cash is slow to materialize in the checking account, it can cause a cash crunch. The operating expenses and purchases are rising, yet the increased flow of business isn’t showing up quickly enough through the receivables. With accelerated growth, it becomes even worse, creating a tighter financial squeeze.
What ways are there to get out of this particular bind? One of them is invoice factoring. It works differently to a business loan and is often easier to qualifier for, especially for newer companies.
Let us now look at why invoice factoring might be the right solution for your business.
It’s Not a New Business Loan
One of the many benefits of invoice factoring is that it’s not technically a business loan, that’s good news. However, if paying loans concern you, check it out this fully customizable excel loan amortization schedule that will help you turn a long-term loan into a predictable monthly payment and reduce the risk of default with just a few clicks.
What it actually means is that you’re effectively selling the value of your account’s receivables. By doing so, the money is available much sooner than waiting for invoices to be paid net 30 or net 60 days.
It Won’t Damage Your Credit Rating
The credit rating is important to businesses because it affects the rate that any loans or other financing may cost.
Taking out factoring isn’t a loan and so it doesn’t kick the financial record or impair future financing attempts either.
Approval is Quicker and Easier than with a Loan
Since factoring is not a loan, it’s faster to get approval. More businesses are likely to qualify too. Why is this? Because the value of invoices and selling this value as part of the factoring process is not a complicated thing. Indeed, a high credit rating is not even a requirement because the invoices representing real trade provides its own form of security.
Is It Simpler to Manage than a Loan?
When comparing applying for and taking out a business loan, is invoice factoring the simpler option? We’d say that it is at the time of inception and on an ongoing basis too. With a loan, even if it receives approval, there’s the question of how best to use the limited loan value. Putting it to its best use is difficult to determine. It’s easy to squander it on low-returning projects but still have the loan to repay, plus interest, from the existing business revenue. That puts your business in a tougher position than today.
With factoring, there’s no large lump sum because a loan was issued. Instead, there’s the value of the sale of some initial invoices and then ongoing sums as new invoices are issued in the course of doing business. Therefore, it’s beneficial because the proceeds are spread out over time – there’s no stress on where to deploy the loan proceeds either.
Invoice factoring is one way to finance a business that is in a cash flow crunch due to its growth. When it’s still difficult to access affordable or convenience lending facilities because of the size or limited years of operations, then factoring has a lot to recommend it.