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Article: An Option for Companies That Can’t Get Business Loans

Have you been looking for a business loan but been unable to find one? Or worse, have you applied for a business loan but had your request rejected? Small business owners are faced by such challenges every day. They find themselves needing a small business financing solution to operate and grow their business, but they can’t actually get one. The problem is that conventional business funding is difficult to secure. Banks are conservative in nature and provide loans or lines of credit only to companies that meet stringent requirements, including:

  1. Providing two or three years of audited financial statements
  2. Having ample corporate collateral
  3. Demonstrating profitability
  4. Having owners with substantial personal collateral to back the loan

Not many small business owners can meet these requirements – especially since most have sunk their life savings into their business and have little additional collateral. So, how do you finance growth under these conditions? Let’s first look at a common financial problem.

If your business is the like most companies in the US and Canada, you have to offer payment terms to clients. This condition means that after you conclude your work or deliver your product, you still have to wait 30 to 60 days to get paid. At this point many small companies run into problems because they do not have the resources to pay all their expenses while waiting up to two months for an invoice to pay. Unless the owner is watching their cash flow like a hawk, it’s easy to get overextended. All it takes are a few extra sales or a few delayed payments. In this scenario, you start juggling payments or making suppliers wait longer than anticipated. Soon, the business unravels and you find yourself in serious financial problems.

Now let’s turn this situation around. Let’s say that your clients paid you quickly – in 2 days. Would you still have working capital problems? Probably not. You would be able to recoup your expenses quickly and grow your business. One simple way to accomplish this goal is to offer your clients a discount for early invoice payment. For your clients, it’s a winning deal that improves their profitability – if they have the cash and if they are willing to participate. However, if a quick-payment incentive option does not work, consider financing your receivables.

Receivables financing is a simple solution that provides many of the benefits that you would get from quick-paying clients without requiring your clients to pay any sooner. The program works by having a factoring company evaluate the creditworthiness of your invoices. Based on their creditworthiness, the factoring company can finance a substantial part of the receivable – providing you with immediate funds. You can use the facility to provide ongoing funding, ensuring that you always have the financial resources to cover business expenses. And, more importantly, you can now offer payment terms to clients without having to worry about slow payments.

One important advantage of receivables financing is that it is much easier to get than a conventional business loan. The most important requirement is that you do business with commercial clients that have solid credit. And, when used correctly, receivables financing can be used as a stepping-stone to qualify for bank financing in the future. Many small companies have used receivables financing to grow their businesses to the point where they qualified for a bank loan or line of credit.

Return to the Business Financing Resource Center.

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