One of the challenges of looking for conventional business financing is that it can take a very long time to find out if you will qualify for it or not. Although there are no hard and fast rules, most companies report that it takes a couple of months to go through the process. It’s understandable that institutions take that long to reach a decision, they have to do a lot of due diligence to make sure they make a solid investment. At the very same time, the long application process also puts your company in the very tough position of waiting a long time to know if you’ll get financing – or not.
If your company needs financing quickly – or can’t qualify for a business loan – you should consider whether invoice factoring is the right solution for you. Factoring financing has been gaining traction, especially among companies that need flexible financing.
Factoring invoices provides a simple very proposition. It allows you to get a funding advance against your accounts receivable, providing you with working capital to pay employees and suppliers. So, instead of waiting 45 days to get paid by a client, the factoring company can give you a working capital advance. This provides the financial liquidity to meet your company’s current obligations and allows you to take advantage of new opportunities.
Factoring can be incorporated into most companies and works as follows. First, you deliver your product or service. Then you invoice your client. Now, instead of waiting to get paid, you send the invoice to the factoring company. In turn, the factoring company advances about 80% of the gross value of the invoice to you. Once your client pays the invoice, the factoring company advances the remaining 20% of the invoice to your company, less the financing fee.
Factoring costs can be higher than the costs of conventional products (e.g. business loans), which should be taken into consideration. Monthly fees can range from 1.5% to 3.5%, depending on the company’s industry, financing volume and other parameters. As a rule of thumb, factoring works best if a company has margins of at least 15% and customers that pay regularly. However, each business owner should evaluate whether factoring will work for the company.
There are some substantial advantages to using accounts receivable factoring. First, accounts receivable financing is easy to obtain. Second, it’s a flexible financing solution where financing increases are tied to your sales, making it an ideal tool for startups. And lastly, it can be setup quickly. Depending on your transaction, many times it can be financed in as little as 2 weeks.
By: Marco Terry
Posts Tagged ‘Working Capital’
Using Invoice Factoring as a Source of Quick Financing
December 12th, 2009Business Financing Is Still Available But It Is Not Cheap Or Easy To Obtain
December 6th, 2009Let’s face it, Banks are just not lending. It does not matter that they received over $350 billion of your money with more to come. It does not matter how strong your business is or how great your credit history. They just are not lending.
Most financial institutions have pulled back credit to businesses. Nearly every well known financial company has stopped offering business programs – be it business credit cards, trade and supplier financing, commercial loans or working capital lines of credit.
These establishments cite poor market conditions and unfavorable economic outlooks.
The quandary comes when businesses, facing the same market conditions, are looking for ways to survive and in some cases grow. In the past, healthy, established businesses could always turn to their banks for needed financing; be it for a short term line of credit or to restructure existing debt; freeing up needed cash flow. Just not so today – especially since part of the blame of our economic toils rests on the shoulders of these same banks.
So if businesses cannot fall back on their bank or other financial institution, what are they to do?
The only real viable financing option for many businesses in this market is private, non-bank lenders. I am not talking about equity capital or private placements. I am talking about investors who have pulled their money out of a falling stock market and are looking to lend it to solid companies in hopes of substantial interest rate returns.
What is this you might ask? There is always a struggle between supply and demand and the arbitrage opportunities that open to investors who know where and when to look.
A few years ago, banks and other financial institutions were lending at rates below or at market level in comparison to potential opportunities – they were offsetting lower returns with fees and deal structure (e.g. ratcheting rates). This left most private investors out of the lending market.
Today, banks are not lending and investors are taking their place. If banks are not lending and businesses need capital – there is a funding gap. This funding gap is wide and does not have many players or competition. Further this gap has huge barriers to entry as capital to invest is not easily obtained or easily given away. What I am saying is that some very smart investors have realized that there is an opportunity here for them to earn substantial returns from lending money to proficient businesses and their owners.
Thus, they are filling the gap left by banks and remain the only real source for business capital. But, they will only do so at very high interest rates.
What I am trying to say is that there are non-bank lenders that will fund companies. But, the power (thus the arbitrage) is in their hands – not yours – making your ability to receive funding both hard and costly.
The products they offer come with high interest rates, huge fees, and deal structures that are extremely favorable to them. These lenders want to see strong (very strong) credit histories, low debt-to-income ratios, and very high repayment abilities. Additionally, should a business have collateral, the property (equipment, machinery, inventory, A/Rs, purchase orders, sales receipts, etc) must be valuable and easily saleable. Gone are the days of 80% and more loan-to-values. Most of these lenders will only lend 50% to 60% against such collateral – especially if it involves a cash out or cash advance option.
Now, I know this does not seem fair – but what is fair in this market? Banks are not lending – businesses need money. You and your business must either take what it can get or get nothing. These investors – the only entities that are still providing money to businesses – could also stop lending if they feel the returns are not there. Then, there would be no business funding at all.
Private investor lending or advance options include:
Accounts Receivable Factoring, Purchase Order Financing, Business Cash Advances, Equipment Loans & Leases and Personal Loans. There also remains a few investor back lenders that will finance the acquisition of a business (without real estate) – all provided the business is cash flow positive, has excellent credit histories (both owners and business) and can provide adequate financials and tax returns to prove it.
Just remember – these are not cheap and by no means easy to obtain – you and your business must still demonstrate a willingness and ability to repay these loans and advances as well as provide (in most cases – Business Cash Advances do not apply here) collateral values that are very favorable to the lender.
But, if this is all that is available – when banks and other financial institutions are not lending to businesses – private non-bank lenders may just be the answer you need to get you though.
By: Joseph Lizio
