If you’re a small business owner in need of increased cash flow, it’s likely that you’ll have considered traditional lending options, such as bank loans. But it might be the case that alternative forms of business financing – such as invoice factoring and discounting – are more beneficial for your business. To help you make this decision, we’ve outlined some of the advantages and disadvantages of these different types of financing…
Financial entities have become increasingly stricter with regard to who they’re willing to lend to, particularly since the onset of the financial crisis. As a result, it may be worth considering invoice discounting as a suitable alternative to traditional business loans. Rather than a fixed amount of money being lent for a stated period, discounting is a form of asset-based lending where capital is awarded against your business’ outstanding invoices.
There are, of course, advantages to business loans. The main one is that – if you have a fixed rate loan – your repayments will remain at the same level each month, which can help with planning. Bank loans can also be cheaper. But there are also major disadvantages to loans – assuming that your business is even in the position to obtain one.
Bank loans can take a long time to process, particularly when compared to alternative options. It’s likely that you’ll have to present a persuasive business plan in order to show the bank that your business is a profitable one. In addition, banks would need to consult credit rating agencies. All of this means that the loan approval process can be a lengthy one. With invoice finance, the process is much quicker, due to there being fewer conditional requirements. This in turn means that funds can be released almost immediately, providing your business with a quick increase in cash flow.
Perhaps the biggest disadvantage to business loans are their inflexibility and risk. With a bank loan, the lump sum you borrow may turn out to be too much or too little. Unsecured loans can be costly and very difficult to obtain. But secured loans place your assets at risk. And this can be your personal assets as well as your business assets. With a business loan you will have to carefully calculate precisely how much money is needed, pay interest on this amount and face penalties if you want to pay it back early.
Invoice finance, on the other hand, is far more flexible. You borrow what you already have coming in which means that the amount that you can borrow grows as your business does. Because the money you’re lent is a percentage of the value of an existing invoice, security is built into the agreement. As well as being more flexible, invoice finance options also pose a lower risk to your business than traditional loans.
The most appropriate form of financing for your business will, of course, depend upon a variety of factors. But if you’re looking for speed, flexibility and lowered risk, invoice finance might be a good alternative to traditional bank loans.