Struggling to obtain small business funding? You’re not alone. Roughly half of all small businesses that apply for funding don’t have their needs met, according to the latest Small Business Credit Survey. Moreover, a significant number don’t even bother to apply because they know they aren’t going to meet the rigid criteria banks set. Thankfully, they’re not the only place to turn when you need funding. Factoring can be an incredibly useful tool for overcoming financial barriers in business, including those with limited credit and collateral. On this page, we’ll walk you through how factoring for small businesses works and cut through the red tape you’re likely to experience with other funding solutions.
Overcoming Credit Challenges with Invoice Factoring for Small Business
It’s difficult for small businesses to qualify for traditional credit solutions. You’ll typically need a 680 or greater personal score, with more favorable terms going to those who have a score of 700 and up, or a FICO Small Business Scoring Service score (SBSS Score) of 155 or greater, per the U.S. Small Business Administration (SBA). This is in addition to requirements related to time in business, cash flow, and more. Businesses that fall short in these respects may sometimes qualify for asset-based lending, but this requires having collateral that’s valuable enough to secure the loan.
Because of this, those adapting to limited credit options often try to do without or borrow from friends and family. However, there are many innovative funding solutions for SMEs that can help in spite of these challenges.
Factoring as an Alternative to Traditional Lending
If you’re exploring alternative financing for limited credit or managing cash flow challenges and don’t want to take on debt, invoice factoring may be an ideal solution, empowering you to take control of your financial situation.
Invoice factoring offers a flexible financing option for small businesses that may not qualify for a traditional bank loan or lines of credit due to poor credit. Instead of relying on your credit history, factoring allows you to leverage unpaid invoices to improve cash flow In this process, you sell unpaid invoices to a factoring company, which advances a significant portion of the invoice’s value, providing immediate funds to support your operations.
Since factoring is based on your customer’s credit rather than yours, it’s beneficial for businesses with bad credit. The factoring company may also handle collections, saving you time and resources. It’s important to understand the cost of invoice factoring, as factoring companies may charge invoice factoring fees that impact your overall financing costs. Both recourse and non-recourse factoring options are available, allowing you to choose the level of risk you’re comfortable with.
Additionally, invoice factoring can help improve your business credit over time by enabling you to meet financial obligations promptly If you’re facing cash flow challenges, invoice factoring can be a valuable tool to enhance liquidity and support growth, especially when traditional financing options aren’t available.
Factoring Versus Traditional Loans
Rather than taking out a loan, which you must pay back with interest over time, factoring gives you an immediate cash injection through the sale of your unpaid receivables. The factoring company immediately pays you most of the invoice’s value and then collects payment from your client based on your invoicing terms. When your client pays the invoice, you receive the remaining sum minus a small fee for the service.
Factoring Versus Financing
Although “invoice factoring” and “invoice financing” are often used interchangeably, they’re distinct. With factoring, you sell your invoice. Invoice financing options, on the other hand, involve taking out a loan that uses your invoice as collateral.
How to Qualify for Invoice Factoring with Bad Credit or No Credit
Qualifying for invoice factoring can be straightforward for small businesses, even if they have bad credit or no credit history. Unlike a business loan, which often requires a high credit score and financial history, invoice factoring companies focus on the creditworthiness of your customers, not your own credit profile. This makes factoring a feasible option for businesses that struggle to meet traditional financing criteria. To get approved, you’ll typically need to provide recent invoices and proof of reliable customers.
Instead of a hard credit inquiry on your business or personal credit, a soft credit check may be conducted on you as the business owner, but the primary assessment is based on your customers’ payment histories. This approach allows even new businesses or those with limited credit to qualify for financing. Small business owners benefit from factoring as it prioritizes the invoice’s value and the customer’s reliability over credit scores, offering a practical funding route that avoids the debt incurred with conventional loans.
Advantages of Invoice Factoring for Small Businesses
There are many invoice factoring benefits. We’ll review a few below.
No-Collateral Business Financing
You can leverage factoring without collateral. The invoice you’re factoring fills this role, allowing you to qualify without putting other assets on the line.
Improving Cash Flow Without Debt
Most cash flow solutions for small enterprises create debt, which often comes with high interest rates and may be challenging to pay off. Factoring is an advance on money you’ve already earned, and the balance is cleared when your client pays their invoice.
Streamlining Operations Through Factoring Services
Factoring is one of the few accessible funding for small companies that addresses back-office challenges. For instance, when you work with a factoring company like Viva Capital, we check the creditworthiness of your clients in advance to minimize your risk. We also address collections, which can save you hours of chasing invoices every week.
Building Business Credit with Factoring
You can also use factoring as a financial tool to help build your business credit. For instance, common credit-building strategies for businesses include things like paying suppliers early, which you can do with your factoring advances. It also helps you keep your debt to a minimum or allows you to pay off your debt, which can help you maintain a healthier credit score.
Factoring for Business Growth
Often, small businesses are hesitant to pivot, accept a large order, or take on a new client because they lack the capital to cover the upfront expenses. Factoring provides small businesses with financial support to address these things, so your business grows strong.
Small businesses with limited credit often struggle to secure traditional financing, but alternative options like manufacturing factoring offer a way forward. By turning unpaid invoices into immediate cash, manufacturers can cover operational costs and invest in growth without accumulating debt. This financing solution provides the flexibility needed to maintain steady cash flow, ensuring business operations run smoothly, even when facing financial hurdles.
The Role of Factoring Companies in Business Growth
Factoring companies play a pivotal role in the growth of small businesses, especially those struggling with cash flow issues. By providing invoice factoring services, these companies offer a lifeline to businesses with less-than-perfect credit. Instead of waiting for clients to pay their invoices, business owners can receive a cash advance from a factoring company, helping them manage daily operations and seize growth opportunities. This immediate injection of funds can be crucial for businesses looking to expand, hire new staff, or purchase inventory.
One of the significant advantages of working with factoring companies is that they do not rely heavily on your personal credit score or business credit score. Instead, they focus on the creditworthiness of your clients. This makes factoring an excellent option for businesses with a bad credit history or those unable to meet the minimum credit score requirements for traditional loans. Furthermore, factoring is a form of financing that does not add to your business debt, allowing you to maintain a healthier balance sheet. The best factoring companies also offer additional services, such as credit checks on your clients and managing collections, which can save you time and resources. Overall, invoice factoring is a great way to support business growth and stability.
Navigating the Factoring Process
It’s easy to qualify for and leverage factoring. We’ll review the process below.
Steps to Secure Factoring for Your Business
You may be able to begin factoring within a few days of your application, provided you have common financial documents available and are responsive to your factoring company.
Step 1: Apply
Provide a few basic details about your business so the factoring company can help determine if factoring and the factor are a good fit for your needs.
Step 2: Provide Documentation
Share a few common financial documents with your factor so they can assess the fit, ensure your invoices qualify, and help you establish strong credit protocols.
Step 3: Submit Invoices
Factoring is flexible. You can choose to factor all your invoices, some, or just one. You can also factor all the time or just as needed.
Step 4: Get Paid
Receive most of your invoice’s value right away. If you’re working with Viva, you can opt for same-day payments or go with a standard accelerated process that has cash in your account within about two days.
Step 5: Receive Remaining Balance
Once your client pays, you’ll receive the remaining value of your invoice minus the factoring fee.
Understanding the Terms and Conditions of Factoring
As you evaluate your factoring contract, be on the lookout for terms that impact how the agreement works. A few are outlined below.
- Minimums: Some factoring companies have minimum volume requirements.
- Contract Length: Ensure you can leave the company whenever you decide you no longer need their services.
- Fees: Watch for fees that can increase your overall costs, such as processing fees, credit check fees, and termination fees.
- Recourse vs. Non-Recourse: Under recourse factoring agreements, you’re responsible for ensuring the factoring company receives payment if your client doesn’t pay their invoice. This is usually done by substituting an invoice of equal value, though each company and contract has different rules. With non-recourse, the factoring company takes the loss if your client doesn’t pay. This option tends to be more expensive and is, therefore, less popular among businesses.
Experience Financial Empowerment Through Factoring
Don’t let a lack of credit or collateral hold your business back. Accelerate your cash flow and grow through factoring. To learn more or get started, request a complimentary rate quote.
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