What is alternative financing?
Alternative lending options for businesses have become increasingly popular in recent years. Oftentimes, business struggle to apply and be approved for traditional small business loans. In today’s current economic climate, with inflation rising by the day, lending from traditional banking sources will become even more scarce.
This need for small business lending has been a catalyst for a wide array of alternative financing options.
Alternative financing comes in many forms. The most important factor is whether a financing product is revenue or equity based. Equity based financing options such as crowdfunding or direct investment can inject capital quickly into your business venture. However, this will come at a cost of equity. Direct investment or crowdfunding can bring necessary working capital quickly to your accounts. However, it is essentially a trade off on future ownership or earnings.
With revenue-based financing, such as invoice factoring, a company is provided funding based upon the dollar value of outstanding invoices. This means that a company can receive working capital. Based upon business they have already invoiced, without giving up any equity in their business.
What are the benefits of alternative financing that is revenue instead equity based?
Traditionally, the most common alternative financing products base lending amounts on established revenues. A good example of a revenue-based alternative financing product is invoice factoring. The core advantage of invoice factoring is the ability to collect on the value of an invoice from a factoring company. Instead of collecting directly from the customer. Your customers might take 30 days to pay the value of an invoice. On the other hand, a factoring company will deposit the value within hours or days.
While the invoice is sold at a small discount to the factoring company, with liquidity readily available a business could focus on taking more purchase orders or expanding with new facilities or equipment.
With equity-based financing, oftentimes companies are faced with a simple decision of whether they will leverage access to short term capital, in exchange for less stake in the very business they just had funded. Working capital may be the lifeblood of a business. The cost of such working capital should be thoughtfully considered if it would mean less ownership in your own business.
Why invoice factoring is an efficient working capital product for managing cash flow
The main benefit of invoice factoring is the ability to actualize the value of outstanding invoices. This happens quickly through your factoring company.
A factoring company who is paying for invoices at the time of their issuance, will effectively replace your accounts receivable department for the invoices you factor. Simply put, when you factor an invoice through your factoring company, the working capital will be debited to your account to be used for operational or expansion purposes and the collection of those invoices is then out of your hands. For many businesses, the combination of the upfront liquidity in congruence with less accounts receivable responsibilities, allows business owners to focus on what matters to them most, their businesses.