There are a number of reasons why businesses can be rejected for small business loans. Some of the main reasons financing a small business can be tricky are credit scores, lack of experience or planning, and lack of assets or cash flows. Cash flow management is definitely an obstacle that can stand in the way of financing your small business. There are options outside of traditional bank loans. Accounts receivable factoring can be a reliable alternative to debt financing when the bank says “No”.
What is Accounts Receivable Factoring?
Factoring is a process where a company such as Diversified Funding will purchase accounts receivables invoices from a business in order to free up working capital and allow for more immediate cash flow. When the accounts receivables are bought by the financier (called the factor) they are bought at a discount.
How Much Does It Cost?
It will depend on how the funding company structures their management. Selling your accounts receivables will advance you a percentage of what the invoice is worth. Once those receivables are paid by your customers, you receive the remaining balance of the receivables, after the factoring fee is subtracted. The factoring fee involved is usually a percentage of the invoice. There are many different aspects involved in how funding companies determine the percentage and what their fees will be. These aspects include the creditworthiness of your clients, the terms of your receivable agreements, the risk included within your industry, and how many invoices you have and their amounts. Because there are so many aspects involved with determining the prices and fees, it is best to get a quote to better evaluate your unique situation.
How is Factoring Different from a Small Business Loan?
Accounts Receivable factoring is very different from a typical loan because there is nothing to pay back. The fee is taken up front and you won’t have to worry about getting your business into more dangerous debt levels. Loans will create more liability on your financial statements, whereas factoring will appear as cash flow and reflect more positively on your financial outlook. Accounts receivable factoring offers even further value because they become responsible for your accounts receivable management. This frees up your time to allow you to focus on more profitable opportunities.
When you are in a situation where you need to finance your small business when the bank says “no,” don’t feel like you need to give up your dreams. There are options out there to get your business the working capital it needs to become the successful, thriving and prosperous company it deserves to be.