Certain traditional lending options, such as a bank loan, are regarded as the only option if you’re in need of a cash flow injection and are a small business owner. However, there are alternative forms of business financing that are also available to you. Such as invoice finance, factoring and discounting. To ensure you are aware of all the facts, we have outlined the pros and cons of both. Thus, allowing you to make an informed decision.
One of the advantages of using the invoice finance option is being able to use invoice discounting. This allows you to not have to worry about how strict financial entities have become. This option is asset-based lending and allows capital to be awarded against your business’ outstanding invoices.
There are also advantages to taking out a bank loan, especially if you have taken out a fixed rate loan. One being that repayments are able to remain on the same level each month. Which allows a business to be able to plan out these repayments easily. This option can also be somewhat cheaper.
However, there are major drawbacks to this option. Firstly they can take a long time to process, not the best idea when you need an immediate cash injection. A reason being that a persuasive business plan will need to be shown. Allowing the bank to see that your business is profitable and you have the means to pay the loan back. This is as well as banks needing to consult credit rating agencies.
Invoice finance, on the other hand, is a relatively quick process. This is due to there being less conditional requirements. Meaning that funds can be released almost instantly, allowing the business to get the quick increase in cash flow it needs.
Major disadvantages of business loans are their risk and inflexibility. The lump sum you receive can end up being too little or too much. Meaning that it might not be enough to pay off the debts or payments you intended for or could mean you have to pay back more than you needed. Which can then result in hardship for your business.
Unsecured loans can be difficult to obtain and be costly but secured loans put both your business and personal assets at risk. The inflexibility comes from the fact that you will have to calculate precisely how much money the business needs, then you will have to pay interest on it and face penalties if you decide to pay this back early.
Invoice Financing is far more flexible, in comparison. As you only borrow what you already have coming into the business. So the more your business does, so does the amount you borrow. There is also less risk, as the money you are lent is a percentage of the value of an existing invoice, which means that it is a secure agreement.
There are many factors that you will have to consider before choosing between a bank loan and invoice finance. However, if you’re looking for an option that is speedy, flexible and low in risk then invoice finance will be the best option for you.