Cashflow Finance For Small Business: 4 Options for Your Funding Mix
When you’re trying to grow, no doubt you need cashflow finance for small businesses. Making hires, buying materials in bulk, and expanding your operations requires having cash available to spend. Low cash flow is a difficult problem to solve when the banks aren’t interested in giving you a line of credit – but there are still plenty of small business financing options available.
See if any of these other forms of funding are fit for covering cash flow gaps in your business.
1. Invoice Factoring
Invoice factoring is a business funding option that leverages money you’ve already earned. Oftentimes, business owners have to wait 30, 60, 90 or even 120 days for customers to pay, leading to low cash flow. Factoring companies advance the total of your invoice (less fees) way ahead of the payment terms, and the factoring company waits on the payment from your customer. The result is increased cash flow for making payroll, paying suppliers, and taking on large projects.
Who should consider invoice factoring?
Companies that are growing fast and can’t keep up with their sales are great fits for invoice factoring.
How Does Invoice Factoring Work?
Here’s a quick breakdown of the basic invoice factoring process:
1. A business owner chooses invoices they want to factor.
2. The business owner receives cash for the invoice amount, less a fee, ahead of the payment terms.
3. The business owner’s customer pays the invoice amount to the factoring company according to the original payment terms.
(Note: This is different from invoice financing, where a factoring company still gives a business owner cash for their invoice, but the business owner pays back the invoice amount themselves, plus a fee. Read our blog post on the difference between invoice factoring and invoice financing for more info.)
Invoice Factoring: Pros and Cons
2. Unsecured Business Loans
If you’re considering cashflow finance for small businesses, Unsecured business loans are a popular choice because they often require little to no personal or business assets to serve as collateral. Because you’re not having to put up collateral to qualify for the loan, the business must demonstrate a robust financial history as well as a positive forecast of its future cash flow. They can also have high interest rates.
3. Business-to-Business (B2B) Lending
Another option to weigh when you’re researching cashflow finance for small business is B2B lending. This is when one business chooses to loan funds to another. In many ways, B2B lending operates in much the same manner as a traditional bank loan, with similar terms and conditions. Often, B2B lenders aren’t the ones making the loans themselves. Instead, they facilitate transactions between small businesses and their lenders.
Because B2B loans are term loans much like a bank, they also have many of the same requirements. While these requirements are often not as stringent as those seen with a bank, they do ask that businesses have high credit scores, established business histories, and a specific amount of annual revenue.
4. Working Capital Loans
Working capital loans are exactly what they sound like: loans you can use specifically for your everyday operations. Short-term cash flow crunches are the most common reason businesses get these loans, due to a growth spurt, a new project, or a gap in sales. They can take the form of term loans or cash flow loans with a fixed fee.
Drawbacks of working capital loans come in the form of high interest rates. As with any loan where collateral is minimized, lenders offset risk by applying high interest rates. These loans are often tied to the business owner’s credit, which means they’ll bear the responsibility should anything happen. It’s important to weigh the pros and cons when you’re considering cashflow finance for small business.