Are you considering options for funding your small business?
Small business loans are
usually coursed through other channels than the traditional bank loan. For
starters, banks tend to be leery of start-ups considering the higher risk
involved. Secondly, other options relating to finance for small business do not
have as high a demand in terms of collateral.
Recently,
small businesses have been tapping into an alternative funding resource called invoice
factoring. What it is, how it works, and how it is different from a typical
business loan are all explained below.
While a small
business loan involves an amount of money borrowed from a financing program
such as that from a bank, a government agency, and any other similar financial
institution to be paid in time with interest, factoring involves a cash advance
on invoices yet to be paid by customers. Basically, with a loan, you get to
apply for it, have your application reviewed and approved, and then get your
funds. The process concerns just you and the lender.
Meanwhile, factoring rests
on the condition that you have receivables to collect. You submit to the
factoring company your invoice, which is then verified with your customer. If
good, this will be purchased by the company and you get your cash right away
minus the reserve.
Your customer sends his or her full payment to the company,
and then the company releases the reserve minus its service fee. The entire
process involves three parties: you, the factor, and your customer.
The paperwork
or documentation necessary to qualify for factoring is also less intrusive.
Loan applications usually entail details of personal background and loan
application history as well as copies of personal financial statements, business
financial statements, certificates or licences, income tax returns, resumes, etc.
For invoice factoring, you usually need to submit copies of corporate tax
returns and financial statements, articles of incorporation or partnership
agreement, current aging accounts receivables and payables, and UCC filings if
you’ve assigned your receivables to another party.
Generally,
approved loans are granted in at least a month while factoring allows
you to get cash in as little time as a week. In the past year, the factoring
market has grown significantly bigger. With the minimal credit checks and
paperwork requirement, so many more start-ups find it a more convenient funding
option and easily qualify for it.
Small businesses also appreciate the fact
that only their receivables need to be pledged. Overall, invoice factoring is
the ideal funding assistance to suit their financial condition.
In the landscape of small business funding, invoice factoring emerges as a viable alternative to traditional bank loans, offering flexibility, speed, and accessibility to entrepreneurs. Unlike conventional loans, which often require extensive documentation and collateral, factoring leverages outstanding invoices to provide immediate cash flow.
The process of factoring involves a streamlined approach, with minimal paperwork and faster approval times compared to traditional loan applications. This accessibility makes it an attractive option for startups and small businesses seeking quick access to capital without the hurdles associated with traditional lending.
Moreover, factoring shifts the risk away from the business owner, as it relies on the creditworthiness of the customer rather than the financial history of the business itself. This reduces the barrier to entry for entrepreneurs with limited credit or operating history, enabling them to secure funding based on their receivables.
As the factoring market continues to expand, more small businesses are recognizing its benefits as a convenient and efficient funding solution. By leveraging invoice factoring, entrepreneurs can effectively manage cash flow, support growth initiatives, and navigate the financial challenges of running a small business in today's competitive landscape.
