There are various short and long-term financing options available in the market. Credit offerings such as personal loans are approved on your individual credit profile and allow the unrestricted use of funds. You can choose to funnel this into your business.
You can work towards enhancing your credit profile and eligibility, and then apply for a loan for a small business. However, depending on your industry and experience, this can also sometimes be a struggle.
Invoice factoring is a great option for such a situation, where you can convert your outstanding invoices into a source for short-term funding. Keep reading to know more.
What is Invoice Factoring?
Invoice factoring is a financing facility wherein you sell your company’s outstanding invoices to a third party. Known as the factor, this can be any authorised bank or NBFC. By selling, you give up the ownership of the invoices, allowing the factor to later collect the payment from your buyers.
In exchange for the invoices, the lender offers you funds of up to 80% to 90% of the total invoice amount. Once they collect the funds from the buyer, and deduct 1% – 2% as fees, the factor will pay you the remaining amount.
This way, you don’t have to wait for payments from your buyers or wait for approvals for your loan for small business. The day-to-day operations of your business will remain unaffected, while the faster cash influx allows for accelerated operating cycles.
How Invoice Factoring Helps to Secure Funds for Small Business Owners
There are a lot of ways business owners can benefit from invoice factoring, when compared to a loan for small business. These are:
Boost in Working Capital
In B2B companies and service-based small businesses, there is often a cash crunch in the period between delivery and customer payment. This is because a lack of cash inflow clogs the working capital. Invoice factoring eliminates this, allowing you to enjoy uninterrupted cash inflows. This boosts working capital levels throughout the company, which fosters business growth.
No Collateral Needed
There is no need to submit any collateral for invoice factoring. Since you are selling the ownership of your invoices to the factor, they don’t require any further guarantee.
This means that you are not adding to the debt portfolio of your company, and are safeguarding your assets from lien.
Bottom-Line Growth
When the factor advances funds against your invoices, it catalyses the operating cycle, allowing you to quickly funnel funds toward production, marketing, expansion and more. This, in turn, leads to high profitability, fuelled by a steady flow of working capital. The enhanced operation ultimately leads to bottom-line growth.
This improves your reputation and credibility in the market, which can influence your chances of getting approval on a loan for a small business in the future.
Alternate Ways of Securing a Loan for a Small Business
While invoice factoring is used by many small business owners, sometimes your business requirements may put you in a position to pursue a loan. A few options you can consider are:
Demand Loan
Under this, a lender offers you a lump sum for your business needs, which they can demand you to fully pay back, at any time.
SME Business Loan or Term Loan
This is a traditional loan arrangement where you enjoy a lump sum repayable in EMIs. It is tailored for SMEs, with special interest rates and loan sanction limits.
Personal Loan
This is when a lender offers you a lump sum for unrestricted use, based on your individual credit history. You can use it to address business expenses.
Pre-Approved Business Loan
Under this, a lender pre-approves a business loan based on your company’s available credit details, even when you haven’t applied for a loan. The loan amount is usually predetermined, and you only need to accept the offer.
Line of Credit
A line of credit financing method approves a limit for credit utilisation. You can borrow funds as little or as much as you like within this limit, and incur interest on only the amount utilised.
Benefits of Pre-Approved Business Loans for Small Business Financing
A pre approved business loan can be said to be the easiest way of securing a loan for a small business. While it requires you to maintain a good credit history and positive business figures, you don’t have to go through the hassle of application and approval.
If you are eligible, lender representatives will reach out with offers. Here are two more benefits of availing a pre-approved business loan.
Instant Availability of Funds
You don’t have to go through the step-by-step application process to gain approval for this loan. You are already eligible, which speeds up fund disbursal, supplying you with the funds needed to meet immediate business requirements.
More Negotiating Power
While a strong credit profile qualifies you for this loan, it also gives you the power to negotiate better terms for it. You can negotiate on interest rates, loan amounts, loan tenures and other fees and charges.
A pre-approved loan, while being a safe bet, also offers insight into the market perception and financial valuation of your company. Whereas, invoice factoring is a viable method used by small businesses to raise funds without taking on additional debt.
As such, there are many options in the market, designed to cater to your small business credit needs. Each has its own merits and demerits, and you have to carefully consider your business requirements before choosing one.
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