Wednesday, 30 October 2013

Small Business Loans Vs. Invoice Factoring

Are you considering options for funding your small business? Small business loans are usually coursed through other channels than the traditional bank loan. For starters, banks tend to be leery of start-ups considering the higher risk involved. Secondly, other options relating to finance for small business do not have as high a demand in terms of collateral.

Recently, small businesses have been tapping into an alternative funding resource called invoice factoring. What it is, how it works, and how it is different from a typical business loan are all explained below.

While a small business loan involves an amount of money borrowed from a financing program such as that from a bank, a government agency, and any other similar financial institution to be paid in time with interest, factoring involves a cash advance on invoices yet to be paid by customers. Basically, with a loan, you get to apply for it, have your application reviewed and approved, and then get your funds. The process concerns just you and the lender. Meanwhile, factoring rests on the condition that you have receivables to collect. You submit to the factoring company your invoice, which is then verified with your customer. If good, this will be purchased by the company and you get your cash right away minus the reserve. Your customer sends his or her full payment to the company, and then the company releases the reserve minus its service fee. The entire process involves three parties: you, the factor, and your customer.

The paperwork or documentation necessary to qualify for factoring is also less intrusive. Loan applications usually entail details of personal background and loan application history as well as copies of personal financial statement, business financial statements, certificate or licence, income tax returns, resumes, etc. For invoice factoring, you usually need to submit copies of corporate tax returns and financial statements, articles of incorporation or partnership agreement, current aging accounts receivables and payables, and UCC filings if you’ve assigned your receivables to another party.

Generally, approved loans are granted in at least a month’s time while factoring allows you to get cash in as little time as a week. In the past year, the factoring market has grown significantly bigger. With the minimal credit checks and paperwork requirement, so many more start-ups find it a more convenient funding option and easily qualify for it. Small businesses also appreciate the fact that only their receivables need to be pledged. Overall, invoice factoring is the ideal funding assistance to suit their financial condition.

Do you have have any questions or suggestions? Write in comment section.
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