Alternative financing is funding provided for businesses outside of traditional bank loans. Alternative lenders offer a range of financing products with flexible requirements. Traditional bank loans tend to be a lengthy and difficult process to qualify for. Fortunately, there are other opportunities available for businesses with some alternative financing strategies.
Invoice factoring is an alternative financing process where a business sells their invoices to a factoring company. In exchange for selling their invoices, the factoring company advances a large percentage of the money owed to the business. They also directly manage payment with your customers. Once the invoice has been completely paid off, the factoring company will send you the remaining balance, minus a small factoring fee for their service.
Invoice factoring provides businesses with immediate, ongoing cash flow. This will allow businesses to meet their short-term financing needs instead of having to wait 30-90 days to receive payment on invoices. Furthermore, credit score, collateral and loan history are not a major factor in getting approved for factoring. This makes receiving funding much faster and more flexible.
Crowdfunding is another alternative source of funding that allows for businesses to raise money from investors. Through the use of social media and crowdfunding websites business owners have the potential to meet investors and raise funding. This strategy allows businesses to raise money without resulting to venture capital investors. However, if the funding goal is not met, any finance that has been pledged will be returned to the investors.
With a merchant cash advance, an alternative finance company provides businesses with a lump sum upfront, which is then repaid with a percentage of the business’s sales. This option is best for small businesses that need immediate capital. A traditional MCA is structured where the provider deducts a daily or weekly percentage of your debit and credit card sales until the advance has been fully repaid. This funding can be provided within 24 hours and repayments can be adjusted according to how your business is performing.
Another type of alternative financing strategy is revenue-based financing. Revenue-based financing is a loan that a business pays back with a part of their future revenue. This strategy helps businesses successfully raise the capital needed without sacrificing their equity or any collateral. It also does not involve interest payments – repayment is a predetermined amount plus a flat fee. Monthly payments increase or decrease to match the natural fluctuations of a business, meaning you will not be burdened by payments you cannot afford.
Benefits of revenue-based financing include it being cheaper and more flexible than other funding options, your business will retain more ownership and control of your business, there are no personal guarantees, payments are flexible, you may have a faster funding timeline, and more.
When a company needs working capital, typically they will reach out to traditional banks to try and secure a small business loan. What many companies learn as they go through the small business loan application process, is that it is not easy to receive approval. It takes a significant amount of time, effort and documentation collection to even apply for a small business loan.
Many companies who follow through with a small business loan application process, find themselves with a rejection after all that effort and time spent.
With revenue-based financing options like invoice factoring, much of the application process is handled by the factoring company. The factoring company will require a few important documents. to access an applicant’s company, but the process can be completed in a matter of days instead of weeks or months.
Invoice factoring is a type of revenue-based alternative financing that is oftentimes confused with a small business loan. The reality is that the application process and the financial products are very different.
With invoice factoring, you are selling your current outstanding invoices at a small discount to a factoring company in exchange for immediate working capital for the value of the factored invoices. Typically, a company will have agreements with their customers to pay an invoice in 30, 60 or 90 days. While having a payment schedule with your customers can be beneficial for forecasting expected revenues by quarter or month, actually collecting on those invoices can be much more difficult.
Here is an example of how invoice factoring works:
Company A has an invoice that is valued at $10,000. The factoring company agrees to purchase the invoice today for $9,700 ($300 fee). The advance which for this example is 85% of the invoice value at $8,245, is than debited to Company A’s account. The factoring company then contacts Company A’s customer, collects on the full invoice amount and sends the remaining balance of $1.455 to Company A once collected.
Traditionally, small business loans require more and different types of documentation to achieve approval. With small business loans, an applicant will likely be required to provide documentation on your company’s credit history. As well as your inferred ability to repay a loan. Some of the documentation that may be required to prove revenues and thus capability to repay are sales projections, past loans repaid and current cash flows.
With invoice factoring, they creditworthiness is focused on your customers and not your business. Since the factoring company will be collecting payments for invoices directly from customers, the customer’s capability to pay off the invoice amount is more scrutinized than the company seeking factoring. This is an important distinction. Most businesses applying for financing do not have good credit thus the need for outside capital.
Businesses from all industries, need consistent streams of working capital to be able to meet daily expenses as well as fulfill their daily operations. Depending on industry, the sales or collection cycle on outstanding invoices can be lengthy. Industries that suffer from a long sales cycle, can oftentimes be hampered by their ability to collect from customers.
Industries such as staffing, facilities management, security firms, food & beverage manufacturers, consumer products and many more all operate with 30 to sometimes even 60 days of collection. A business with such a long collection cycle can benefit from the capability of being able to factor specific invoices to manage cash flows.
A company that is considering invoice factoring should conduct thorough research on how factoring works and contact invoice factoring companies that offer flexible terms.
Applying for factoring is not difficult, and most of the application process is performed by the factoring company.
Some of the required documents for review will likely include:
Flexible terms, and a consultative approach are the most important factors when considering a factoring company.
The terms to consider mostly center around which invoices can be factored, and what is the agreed upon discount rate for the value of those invoices. Most factoring companies will discuss these options and consult on rates.
Invoice factoring is a financial service that requires a factoring company to collect invoices from the businesses’ customers. Due to this intimate knowledge of your business, and communication with your customers, when researching factoring companies, consider whether their factoring program is consultative and sensitive to your business needs.
CapFlow Funding Group provides a consultative, customized approach to its factoring services. To receive a risk-free complimentary consultation, fill out the quick form on our apply now page. https://capflowfunding.com/apply-now-funding/
Invoice factoring is a financial service that allows a company to sell the value of their outstanding invoices at a discounted price. The factoring company will pay you immediately for your invoices, at a small discount, and then collect on the invoices directly from your customers.
For many companies, invoice factoring is a beneficial service that shortens the sales cycle and allows businesses to collect faster on their invoices than if they had operated their accounts receivables internally.
Running an accounts receivables department can often be time consuming, and costly in-regards to day-to-day cash flows. Cash flow is the lifeline of liquidity in which a business operates and meets its growth objectives. Without working capital to meet normal business obligations, businesses struggle to make sales goals in addition to expansion.
It’s difficult to review outstanding invoices and then make the necessary calls and emails to customers to collect and actualize those revenues. For many businesses, new purchase orders are oftentimes delayed by collections of receivables. This is where a factoring company comes in and provides the working capital a business needs upon the drafting the invoice. The company would then receive the agreed upon value of the invoice in a deposit to their account, and the factoring company would then collect on the invoice value directly from the customer.
Having the capability to collect on invoices faster, provides certain agility to a business that might not have been the case with an internal accounts receivable department. Liquidity is king in providing a business the fuel it needs to actualize expansion opportunities like new facilities, or simply take on more purchase orders due to a more efficient sales cycle.
At CapFlow Funding Group, we work with our customers as partners in their business objectives. We offer a wide range of flexible terms that are designed to provide custom working capital solutions, for your unique business.
We will work with your team and consult on rates, which invoices to factor and more. It’s important to consider factoring with a company that will consult with you 1 on 1 to understand the specific needs of your business, and which invoices should be factored for quicker access to working capital.
The 2008 financial crisis caused banks to tighten restrictions on small business loans. They focused on larger loans as they are more profitable. With the economic downturn that resulted from the COVID pandemic, traditional business financing is harder to secure than ever. Grant programs such as the PPP (Payroll Protection Program) and EIDL(Economic Injury Disaster Loan) have dried up. Business owners that are still struggling to recover are looking for alternative funding options to keep their businesses afloat. However, this is not the only reason business financing alternatives are becoming more popular with business owners. They offer benefits beyond funding.
One of the biggest frustrations of traditional business financing is how long it takes to get a loan. Certain steps must be taken before the bank will even accept the application. Then once it is submitted, approval can take anywhere from a couple of days to months. That can be too long to wait for businesses that need funding fast.
Business finance alternatives typically require less information than banks, making the application and approval processes much quicker. Businesses can often have the funds they need within days, allowing them to spend less time searching for financing and more time on taking care of business.
Even if you have all the proper documentation prepared when applying for a traditional loan, certain industries have been “black listed” by banks insured by the FDIC (Federal Deposit Insurance Corporation). The reason is that those businesses are considered high risk and the FDIC won’t insure banks that issue high-risk loans.
Businesses that work with alternative lenders often find more success when looking for business financing. Business owners should do their research and weigh their options. If your business is typically turned away by banks, don’t waste valuable time jumping through their hoops. Instead, consider the business finance alternatives.
Unless you’ve been dealing with the same bank forever, most of them will just take your mounds of paperwork and follow a standard checklist to see if you qualify for financing. Alternative lenders focus on understanding your business and building a relationship. This may not seem all that important at first but think about it.
Many business finance alternatives provide short-term financing, something many businesses will need more than once. Establishing a relationship with an alternative lender will make the process even easier the next time you apply. With a bank loan, you have to go through the entire application process every time, and the chances of being approved are slim. Alternative lenders work hard to get your application approved for funding.
If approved for a traditional bank loan, beware. They often come with strings attached called loan covenants. These covenants place restrictions on how you can spend the funds you received. Do you want someone else telling you how to invest in your business?
With most business finance alternatives, once you have been approved and received funding, you can spend those funds how you see fit. Some options, like the merchant cash advance, include repayment amounts that fluctuate with your cash flow.
If you need immediate funding or have been denied a traditional loan, alternative financing options could be the answer to your problem. At CapFlow Funding Group, we value each of our clients and work hard to provide them with the perfect funding solution for their business. Our team works with various industries and specializes in invoice factoring and merchant cash advances. If neither of these fits your needs, we will work with trusted partners to get the funding you need. Contact us today. We’re looking forward to getting to know you.
Traditional business loans are becoming increasingly difficult to obtain. This has caused more business owners to consider alternative financing options to get funding for business growth. With multiple funding options to choose from, how do you know which would be best for your business? Two popular options for business funding are the ACH loan and the merchant cash advance. However, just because they are a popular choice, that doesn’t necessarily mean either is the right choice for your business. To make a wise decision when choosing between these or any other alternative funding options, it’s important to understand how they differ. Let’s take a more in-depth look at each of these options to make the choice easier.
Although it is called a loan, an ACH loan is actually an advance on future revenue. ACH (Automated Clearing House) refers to the method of repayment. With an ACH loan, the business receiving funding will repay the lender via direct withdrawals from their business bank account.
These withdrawals are a set amount taken at specific intervals and will be monthly, weekly, or daily depending on the terms offered by the lender. Regardless of any fluctuations in your incoming revenue during the repayment period, your payments will remain the same. If your revenues should decrease during the repayment period, you could face a serious disruption in your cash flow.
ACH loans are designed for most types of business and can be a good option for short-term funding. When evaluating your application for ACH funding, lenders will be more interested in the average daily balance of your business checking account rather than your credit score. Loan amounts are generally smaller than some other funding options and the APR can be significantly higher. There are often origination fees, prepayment penalties, and other costs.
There are many similarities between the ACH loans and a merchant cash advance, which can lead to confusion. The merchant cash advance is also not considered a loan and payments are made automatically. It is an advance on future credit and debit card revenues and is designed specifically for merchants who receive most of their revenue via debit and credit card sales.
Repayment is based on and deducted from these sales. This is where the major difference between the merchant cash advance and an ACH loan is revealed. While ACH payments are static, merchant cash advance payments fluctuate with the rise and fall of debit and credit card sales. This built-in flexibility can help to prevent any cash flow disruptions during the repayment period that could impact daily operations. The repayment schedule can be monthly, weekly, or daily depending on the terms offered by the merchant cash advance provider. The APR for the merchant cash advance will be higher than that of traditional loans. There is no opportunity to pay down the principle in order to decrease the interest due. The full interest amount must be paid along with the entire advance amount before the merchant cash advance is satisfied.
As you can see, like most funding options, there are pros and cons to both ACH loans and merchant cash advances. However, with the low approval rate of traditional business loans and the long line of business hoping to receive SBA loan approval, alternative funding options can be a great source of timely short-term funding to address your current business needs.
CapFlow Funding Group works with a variety of different industries to provide the funding they need to keep their businesses moving forward. Although we specialize in invoice factoring, we work with trusted partners to provide merchant cash advances as well as other options. We can also help you understand the differences between the options available. Our goal is to provide you with the best possible funding solution for your business. Contact us today to see how we can help you get the funding you need.
The COVID pandemic has wreaked havoc on the small business community. Unfortunately, the Payroll Protection Program (PPP) and other federally-funded programs fell short for many small business owners. According to a May 2020 article in the Washington Post, more than 100,000 small businesses have closed due to the economic downturn that resulted from the pandemic and that number continues to increase. However, some small businesses are exploring alternative funding options to try and overcome this crisis. For many, a merchant cash advance could be the lifesaver they’re looking for.
It isn’t a matter of choosing one over the other. By all means, as a small business owner, if you qualify for a PPP loan, you should take advantage of it. As long as you follow the restrictions that accompany this type of funding, the loan is forgiven. This is where a cash flow gap occurs for some small business owners. The PPP requires that 60% of the funding be spent on payroll in order for the loan to be forgiven. For businesses that only have a few, that may not be possible. Even if it is, the remaining 40% may not be enough to cover other overhead expenses – never mind financing what you need for a successful recovery.
Obtaining a traditional business loan from your bank became difficult after the financial crisis of 2008. Although approval rates were beginning to improve, the COVID pandemic brought that to a screeching halt. Even if your chances of getting a traditional loan are better than most, receiving that funding can take a long time and involve a lot of paperwork. If it’s time to sink or swim for your small business, do you really have time to wait? Merchant cash advance funding can have you approved in hours and funded in days.
In addition to getting the funding your small business needs to work toward recovery quickly, there are a few other benefits of merchant cash advance financing.
The last thing a small business owner wants to do in the current economic climate is to add long-term debt to their balance sheet. A merchant cash advance is not a loan. It is an advance on your future debit and credit card sales. Repayment is automatically deducted from those sales at an agreed-upon percentage. This means your payments will increase or decrease in proportion to your sales. With the money to finance any operational adjustments your business needs to succeed in the new normal, your sales will rise and your merchant cash advance will be paid off in no time.
That’s not a problem. Merchant cash advance approval is based on more than just your credit score. Their approval rate is generally higher than that of traditional financing. Your credit rating can impact the amount of your cash advance, however, it isn’t the primary factor in granting an approval. The revenue generated by credit and debit card sales is instrumental in receiving approval as well as the average daily balance of your checking account, any overdraft fees, and negative balances.
Unlike the PPP loans, you can use merchant cash advance funding to cover any business expenses necessary. Whether you need to purchase new equipment, develop new operating procedures, or hire an agency to help you compete in the online marketplace, a merchant cash advance can make that happen and have your small business on the road to recovery in no time.
If your business needs an immediate influx of capital to keep your business moving forward, a merchant cash advance can be a great solution. At CapFlow Funding Group, our team of professionals will evaluate your business’s unique situation and help you determine which funding option would best suit the company’s needs. We service many different industries with a variety of different funding needs. In addition to merchant cash advances and invoice factoring, we work with trusted partners to provide additional merchant funding options. Contact us today!