Tag: alternative lending

Alternative lending through Invoice factoring companies like Charter Capital.

What Working Capital Options Are There for Small Businesses?
Small businesses have historically turned to banks to get the funding they need, but traditional funding is expensive, and it’s always been tough to get approval. In the throes of COVID-19, approval rates further plummeted to a mere 11.5 percent, according to the Small Business Lending Index. No doubt, a result of the increasing difficulties small businesses face trying to keep their doors open amid a pandemic and make good on their payments.

As one of the most economically challenging years on record comes to a close, and small-business owners look to the future, many seek reliable working capital solutions. Below, we’ll explore what’s out there and which solutions are most viable for those persevering through the pandemic and its aftermath.

Alternative Loans vs. Traditional Loans for Small Business

There are distinct differences between alternative business loans and traditional loans offered by banks. Whereas the banks have gravitated toward federal programs and have a slew of guidelines they must follow to participate, alternative programs have been able to maintain their community focus by eschewing them. That in mind, alternative business loans are a great option when banks fall short.

Borrower Requirements

Banks have rigid borrower requirements. In short, banks are incredibly risk averse, and they often work with SBA loans. It’s hard to qualify for an SBA loan to begin with, but if a borrower defaults on one, the SBA picks up most of the outstanding balance, so the bank isn’t on the hook. Generally speaking, they’re not eager to lend cash unless they’ve got an assurance like that or you’re solid on paper; have a good credit score, have steady cashflow, are making strong profits, etc. Many small businesses simply can’t meet the criteria, and even those which did prior to COVID-19 struggle today.

Alternative business loans typically have reduced borrower requirements. Alternative funding options rose to popularity because of the obvious gap banks leave behind. There are solutions for virtually every stage of growth, whether you’re still building credit, experience revenue hiccups, or receive payments inconsistently.

Speed of Funding

It can take weeks or months to get bank funding. There are lots of regulatory hoops to jump through when you get traditional lending. Suffice it to say, even an SBA Express Loan can take 30-60 days to pay out, while more standard options typically fall in the realm of 60-90 days.

Funding is generally faster with alternative lending. Each lender and program is different, but there are alternative lenders that can deposit funds in your account the same day you’re approved. It’s quite common for a small-business owner to complete the entire process and have their cash in less than a week.

Types of Alternative Business Loans

Because traditional lending leaves small businesses underserved for lots of reasons, there is all sorts of different types of alternative lending options to help fill the gaps.

Business Term Loans

The business term loan is what comes to mind when most people think of a loan, even if they don’t know the proper term. In short, a lender provides a lump sum for a specified period of time and the borrower pays it back in installments with interest. Criteria for qualifying for business term loans is rigid. You’ll typically need excellent credit, steady cash flow, and to meet other requirements unless you’re using collateral.

Lines of Credit

Just like credit cards, lines of credit are accounts with a predetermined limit that borrowers can draw upon. When the account has a balance, the borrower must make regular payments toward it. Requirements for qualifying are similar to a business term loan.

Invoice Factoring

Although technically not a loan, invoice factoring allows B2B companies to sell their invoices to a third party, known as a factor or factoring company. The factoring company gives the business a lump sum payment that covers most of the invoice, then collects from the company being invoiced, and then sends the remaining payment, minus a nominal service fee, to the business. It’s easier to qualify for factoring because the invoice serves as collateral and instant funding is sometimes an option.

Merchant Cash Advances

Also known as MCAs, merchant cash advances are typically used by companies that accept credit card payments. The lender, typically the company processing the credit card payments, looks into how much the business earns in credit card payments and establishes a loan amount based on the income. Rather than the business making payments to the lender, the lender deducts a portion of income from future sales to cover the interest, fees, and balance. Some MCAs work like term loans, where the borrower receives a single lump some, while others work like lines of credit and the borrower can draw from their available limit. Because the payments serve as collateral, it’s usually easier to get approved for an MCA but it’s common for borrowers to pay 20 to 30 percent for the privilege.

Peer-to-Peer

Sometimes referred to as P2P, peer-to-peer lending allows individuals and groups of people to fund a loan. With today’s modern P2P platforms, individual contributions can range from a few dollars each to well into the thousands and, although these are typically everyday people, more often than not, they’re looking for proof that they’ll get their cash back with interest just like the banks would. Sometimes the platforms set the exact same criteria banks use too. That in mind, it’s not always easier to get a P2P loan than it is to get one from a bank.

Crowdfunding

Often confused with peer-to-peer lending, crowdfunding gives the investors an equity stake in the company. Although you don’t have to pay the investors back, they retain their stake indefinitely, meaning they will earn income from your business for as long as it’s producing income. An example of this is Kickstarter. Although the requirements aren’t as stringent as a bank’s, the business owner must essentially dazzle investors enough to get their buy-in and build relationships to encourage contributions.

SBA Loans

Small Business Association (SBA) loans actually come from a bank, just like other traditional lending solutions do. That means they’re not really alternative loans, but they’re widely misunderstood, so we’ll cover them here. With an SBA loan, the SBA agrees to pay back most of the loan if the borrower defaults. This gets banks to agree to lend more often because there’s less risk for them. However, the criteria for approval is very close to what you might find from a traditional bank loan. A new business, or one with bad credit, is going to have a hard time getting an SBA loan.

Equipment Loans

With equipment loans, the item you purchase is used as collateral, so it’s sometimes easier to get approved. If you need tires for your truck, machines for manufacturing, office items like computers or printers, an oven for your bakery, or similar equipment required to operate, an equipment loan may be ideal. However, you will typically need to pay at least 20 percent of the cost of the item and meet other eligibility criteria.

Best Working Capital Financing Options for Small-Business Owners

Coming out of 2020 and throughout 2021, small-business owners are likely to become even more reliant on alternative lending to get working capital than they have in the past. A few of the best working capital financing options for small-business owners are outlined below.

Funding Circle: Best for P2P Loans

Offering some of the most competitive rates among online lenders, Funding Circle is a solid P2P choice. APRs range from 12.18 to 36 percent, there’s no minimum revenue requirement, and you can get cash in as little as three business days. However, you will have to have a minimum credit score of 660, plus their process requires a business lien and personal guarantee.

Kiva: Best for Microloans

The non-profit crowdfunding platform Kiva offers interest-free loans of $1,000 to $10,000. It relies on the premise that everyday people will read your personal story and want to fund your loan, with each person providing $25. In the background, Kiva actually works with larger lenders and full underwriting teams who fund the loans in a more traditional manner. However, the lenders are more willing to loan because some of their risk is mitigated by people chipping in.

Accion: Best for Startup Business Loans

The non-profit Accion provides microloans and general small-business loans ranging from $200 to $750,000 and pair it with counseling and mentoring to make entrepreneurs more successful. Their goal is to help the most vulnerable groups succeed, and as such, they focus on lending to women, veterans, people with disabilities, Native Americans and other minority business owners. The minimum credit score starts at 575 and APR ranges from 7 to 34 percent for most loans.

OnDeck: Best for Repeat Borrowing

If you have a credit score of at least 600, OnDeck may be able to get you cash on the day you apply. However, the company has a fixed-fee structure, which means you won’t save anything by paying the loan off early and APRs can range from 9 to 99 percent.

StreetShares: Best Balance of Rates/Requirements

Businesses that don’t usually qualify for loans due to limited time in business or low revenue may have better luck with StreetShares. With a minimum credit score of 600, borrowers can qualify for as much as 20 percent of their annual revenue and get an APR somewhere between 8.00 and 39.99 percent.

Charter Capital: Best for B2B Companies with Invoices

Offering invoice factoring for a wide range of industries, Charter Capital provides same-day funding without taking on a loan that needs to be repaid. Because factoring relies on the creditworthiness of the customer paying the invoice, even businesses without good credit can qualify and there’s no long-term contracts.

What Are the Uses of Alternative Loans?

Alternative loans can be used the same way traditional loans can, though some are set up to help with specific needs.
- Payroll
- Equipment
- Real Estate and Expansion
- Inventory
- Vendor Payments
- Working Capital
- And More
How to Obtain Alternative Financing

Getting started with alternative financing is easier than you might think.

1) Find out which types of alternative financing are right for you. Use the list on this page to get a better feel for which types work best for various needs and what options are likely to deliver the best value.

2) Talk to various lenders. See if they will provide you with a free estimate or rate quote, but be wary of companies that do hard credit checks in order to do this. Whereas a soft check won’t harm your credit score, it can be difficult to get approval for a loan if you have recent hard inquiries.

3) Ask for it in writing. Look over your contract and their proposed rates to ensure everything is in order. Watch for hidden fees and penalties. Try to find options you can pay off early or that don’t require contracts.

4) Get advice if you need it. Use resources like the BBB and review sites to see what experience others have had with a lender. Talk to other business owners who have had needs similar to yours and have gotten alternative financing.

5) Compare your options. When you have a group of lenders and packages, compare them together and see which one is right for you.

Explore Invoice Factoring with Charter Capital

If getting an instant cash injection without taking on a loan sounds ideal for your situation and you invoice other businesses, get a free factoring rate quote from Charter Capital.
September 14, 2020
Invoice Factoring: A Better Way to Manage Your Accounts Receivable
A vexing problem almost every business faces, large or small, is accounts receivable. How can you get payments from your customers in a quick and timely manner? Is there a way to get them to pay faster? And if not, is there a way to get around the 30- or 60-day lag from when your invoice goes out and their payment comes in?

The answer is yes! Through “invoice factoring,” you can sell your accounts receivable to a third party (known in the business world as a “factor”). The factoring company will pay you immediately and collect the money themselves down the road. This innovative financing concept provides businesses of all sizes with much-needed flexibility in obtaining capital. Factoring costs are directly related to the business cycle, making it an attractive option for various industries, including factoring for service providers

Want to make the most of invoice factoring? Here are a few helpful tips to get you started:
- Understand what invoice factoring is and what it isn’t – Invoice factoring and invoice financing are two types of accounts receivable financing. Invoice financing is similar to invoice factoring in that it’s a way for businesses to get paid quickly on an invoice, rather than having to wait weeks or months before payment is officially due. However, invoice financing doesn’t involve selling invoices. Factoring can certainly help your business improve its short-term cash flow and enable you to get almost immediate money from outstanding invoices. However, factoring cannot, and will not, solve ongoing issues such as customers with bad credit or clients who exceed their credit limit. Yes, a factoring company can aid with some of these, such as performing customer credit checks on your behalf, but ultimately, it’s up to you to determine who is creditworthy, how much credit you should extend, and the terms and conditions of that credit. If you insist on extending credit beyond the amount a factoring company recommends, you are increasing your risk.
- Organization, organization, organization – Before you can even start to take advantage of invoice factoring, you have to know who owes you, how much they owe you, and when that bill is due. After all, if you don’t know the answers, how can you expect a third party to know? If you haven’t done so already, get your customer account files into shape before you engage a factoring company. Make sure all customer files have every piece of correspondence between you and the client, as well as all invoices and payments. Once you’ve done this, you’ll better understand the relationship’s history and, more importantly, you’ll have a clearer picture of the outstanding invoices you can send to a third-party factoring company. Plus, you’ll have an organized accounts receivable system, which is always a good thing.
- Be open, accurate, and include all liabilities – It’s natural as a business owner to be leery of disclosing delicate company information to strangers. However, to get the most bang for your factoring dollar, it’s best to be upfront about all liabilities, including the extent of your company’s indebtedness. By being open and honest, the factoring company can get a more accurate picture of your situation and can better devise a strategy for accounts receivable factoring.
If you’re a business owner navigating accounts receivable challenges, it’s important to recognize that different industries may require unique factoring solutions. For example, staffing factoring is specifically tailored to address the cash flow needs of staffing agencies, allowing them to meet payroll obligations without delay. By leveraging this industry-specific option, staffing companies can maintain steady operations and focus on growth, rather than worrying about gaps in cash flow caused by extended payment cycles. Equally, businesses in the oil and gas sector can leverage oilfield invoice factoring to address industry-specific challenges related to maintaining cash flow.

What are the benefits of invoice factoring?

By uncovering the benefits of invoice factoring, you’ll also learn how it can help grow your access to working capital without going into debt!

Invoice factoring is an alternative form of financing that is available to businesses that may not have an established banking record with a major lender. Banks and traditional lenders often operate on a line-based financing model based on what your business has already done and the assets you currently own. Invoice factoring, on the other hand, is an innovative way for your business to access the funds you have tied up in your accounts receivable.

Here are four major advantages of invoice financing:

1. Shift your cash flow into high gear

Applying for business loans or alternative financing options can take months to get approved. With invoicing factoring, your business can get much quicker access to cash if you have immediate financing needs.

2. Financial flexibility

If your business requires financial flexibility in terms of maintaining cash flow, then invoice factoring would be your best option. This way, invoices don’t have to be paid in full before there is money in the business account.

3. Higher probability of financial approval

When determining the chances of accessing funding – aspects such as your credit score, collateral, and financing history are often considered with traditional financing. However, these are not required for invoice factoring approvals. Your factoring partner is more focused on the payment history of the customer required to pay the invoice. This is important to understand the level of risk that would be taken in invoice factoring.

4. Save time and money – No collateral required

Normally, when a business applies for a loan or line of credit, the bank requires the business to have upfront collateral such as equipment, vehicles, buildings, inventory, or even intellectual property. However, with invoice factoring, a business doesn’t have to worry about showing that traditional collateral. This can save you enormous amounts of time and paperwork.

With these tips in hand, what can invoice factoring do for you? By employing a third-party factoring company, you’ll be able to now:
- Improve business cash flow
- Invest that money back into your business and into your staff
- Move resources away from collections into more useful and profitable positions, such as sales, marketing, or customer service
- With more reliable cash flow on your end, you’ll be current with your suppliers and may even be able to negotiate better terms.
Now that you have a few ideas on how to make the most from invoice factoring, how do you choose a factoring company? Here are a few questions to ask when considering employing an accounts receivable factoring company:
- How long have you been in business?
- What are your fees?
- Must I submit all invoices, or do I have a choice in which ones I send to you?
- Are you industry-specific? Do you have experience with companies like mine?
- May I see references?
Choosing an invoice factoring company is, like all business decisions, one that should be made only after careful consideration. It’s important that you find someone who understands your business and your unique situation. No two businesses are alike. Find a factoring company that not only understands you but one that can offer you a range of solutions to your cash flow problems. The future of your business could be riding on your choice, so be sure, as with any transaction, you arm yourself with the best information you can find in order to make an informed decision.

If you’re ready to grow your business by factoring your accounts receivables, Charter Capital can help. Establishing yourself and finding out your accounts receivable factoring rate is free, so you can get started on improving your cash flow right away. Request a complimentary invoice factoring rate quote now.
September 9, 2019
Tired of Striking Out with Banks, Small Businesses Find Alternative Lenders’ Pitch More to Their Liking

In baseball, a player who bats below .200 is said to be hitting below the Mendoza Line, so named for a light-hitting shortstop for the 1970s Pittsburgh Pirates. That means the batter makes an out more than eight out of every 10 at bats. Sounds pretty futile, doesn’t it?

Small businesses often face a Mendoza Line of their own each time they apply for a loan. Nationally, banks reject small business loan applications 80 percent of the time, on average. So, each time an entrepreneur walks into a bank seeking capital to start or expand his or her business, they might as well be poor Mendoza batting against fireballing Nolan Ryan. The results are going to be about the same – another frustrating effort often ending in failure.

Mendoza was just plain out of luck and out of baseball after a few lackluster seasons. There’s just not much of a market for players that can barely hit their weight. Small business owners, however, have found other options for their lending woes. Thanks in part to the power of the Internet, these entrepreneurs have discovered new funding sources ready to go to bat for them instead of tossing curveball after curveball their way.

Online lending has proven to be a home run for capital-hungry small businesses. In fact, it’s been such a hit that 2018 was the biggest year yet for online lenders. Unlike standard brick-and-mortar banks, online lenders have proven much more willing to lend needed money to startups or young businesses looking to grow. While banks may okay only 20 percent of small business loans, online lenders are approving three times that amount, earning many appreciative fans in the small business community. Another advantage in their favor over traditional banks is a more simplified application process and a faster review/approval.

Peer-to-peer lending offers entrepreneurs another funding alternative. Investopedia defines peer-to-peer lending as “a method of debt financing that enables individuals to borrow and lend money without the use of an official financial institution as an intermediary.” You may have heard peer-to-peer lending also called social lending or crowdfunding.

This method of funding works a little like on online dating service. Only in this case, it’s a business and investor that hook up, rather than two lonely hearts. A small business looking for money puts a profile of itself on a peer-to-peer online platform. Interested investors can view these profiles and assess whether they want to lend money. The investor can lend all or only part of what a business needs. If the small company only gets a portion of what it’s seeking, it can keep its profile active online for other potential investors. The small business and the investor(s) must agree on repayment plans and interest rates. And, of course, the online platform that brought the two (or more) parties together also gets a slice for providing the service. As you can imagine, however, it’s certainly much easier and quicker to obtain funding this way.

Since Mendoza seldom got on base, he wasn’t much of a base-stealing or scoring risk to opposing teams. But online lending and peer-to-peer lending do have risks which you should be aware of before trying them.

With online loans, fees and interest rates generally tend to be much higher than for traditional loans from a bank. Plus, there are often more fees attached to the online loan than loans from other sources.

Many online loans have set repayment provisions, and these provisions could wind up making the loan more of a hindrance down the road than a help. If you are expecting a traditional once-a-month payment plan, for example, you may be surprised to learn the online lender you’ve taken a loan from actually requires payment every week, or in the worst cases, even daily.

Finally, there is the security issue. News reports come out almost daily about online scams of all kinds. Just because someone has put up a website advertising online loans does not automatically mean it’s a legitimate firm. There’s the possibility it’s a fly-by-night outfit looking to steal your information and good name for their own nefarious uses or a lead gatherer who will then sell it to online lenders.

As for peer-to-peer lending, interest rates may prove problematic. These rates can often reach more than 30 percent, especially for companies the investors view as risky. After all, a peer-to-peer loan is an unsecured loan for the investor, which means no collateral for repayment should the borrower default. Investors want some assurance they won’t lose everything in case of default, and that’s accomplished partially through high interest rates.

When looking for capital via online or alternative funding sources such as peer-to-peer lending, it’s best not to immediately swing for the fences. Do plenty of research beforehand. A good hitter studies that night’s starting pitcher looking for clues as to each pitch’s speed, movement and location before stepping up to the plate. Make sure you have a solid grasp of your true needs and of the risks and benefits of these non-traditional funding sources before pursuing a loan. You may find these choices a great resource for your business… or you may discover you’re better off taking your chances with a traditional bank. The one thing you don’t want to do is desperately flail away and make a costly out or error that will end your season and perhaps even your business.

A better play might be to consider another form of raising needed money for expanding a business, adding employees, buying new equipment and improving cash flow. This option is called invoice factoring. Invoice factoring allows you to “sell” your accounts receivable invoices to a factoring company. The factoring company pays you upfront for outstanding invoices, giving you the cash you need today to run your business, and eliminating the worry and hassle of slow pay collections. That’s now the invoice factoring company’s concern, leaving you free to run your business.

Invoice factoring is a convenient alternative to a traditional bank loan or fee-laden online loans and risky crowdfunding. Each of these sources require a long-term contract. Factoring, however, gives you the money you need when you need it with no long-term obligations. You can also get cash quicker through invoice factoring – usually within a day or two. If you would like to learn more about how invoice factoring works and how it can step up to the plate for your business, simply call toll-free 1-877-960-1818 or email [email protected]. You may find it a great addition to your lineup.

March 8, 2019
Small Business Street Smarts

Small businesses often fail to grow for lack of funds to cover short term working capital needs, not because business is bad! The biggest challenge faced by most small businesses is how to fund the growth that makes owning your own business a worthwhile endeavor. Once a business is up and running, cash flow issues, funding growth, dealing with the natural ebb and flow of the sales cycle, become the daily issues that can potentially undermine the financial future of the business. Traditionally, start-ups use a small business loan, as seed capital, which remains an ideal, low risk approach. Private investment is another common, but more costly, route for small business to take in business capital. Regardless of the merits to either source of funds, when does it make sense for small business to use alternative sources of funding, like Invoice Factoring?

There are many reasons why traditional bank financing may not be a good option for you. The loan application process can be long and cumbersome. The delay from the time of submission of the application to loan disbursement can be substantial as well, putting extra constraints on your ability to timely pay your operating costs. In some cases, you may not be creditworthy, or you may have used up your available credit limit, or you may have too much trade and other debt built up in your business.

In the case of private investment, capital cash injection is given in exchange for equity in the business. This type of investment can take various forms, but it will ultimately end in diminished equity in the company that you worked so hard to build. While more often used by large corporations, the costs associated with private investment are more seriously felt by small businesses, especially in situations where there is only one or very few owners involved. Private investment usually demands ownership rights which dilutes the value of ownership shares and usually creates a situation where the private investor has a preferred status relative to the original owner and priority in terms of getting repaid. Additionally, it usually results in a lack of control over the decision making processes relative to the demands of the investor and the capital invested. These hidden costs need serious consideration.

So, how do you finance an unexpected opportunity to double your sales? Given any opportunity to meaningfully increase your sales, how do you manage, especially when you know that your customers will expect customary payment terms? Making application for a new or expanded bank line of credit can result in long and protracted negotiations. If the banker decides your desire or ambition to grow is too aggressive or financially risky, then where do you turn? If you have no or limited availability to draw on a traditional line of credit, then you will most likely miss the opportunity to increase your sales. The time it would take to acquire capital from a private investor is certain to be even more protracted and costly. Well, this is a good example of when you should consider an alternative funding source like “Factoring”. Factoring is the financing industry term used to describe the sale of accounts receivable (open invoices) at a discount from their face value. It may not sound common, but over $1 trillion in sales is factored worldwide annually. In the United States, there are many independent finance companies that offer Factoring. Some banks even have Factoring divisions. In modern times, Factoring has become a champion of small business and an ideal alternative to a bank loan or private investor funds.

Factoring involves the sale of accounts receivable at a discount. Essentially, you sell your receivables (open invoices that are due to you from your customers) to a “Factor”, who discounts the value of them and pays you in advance of actually collecting payment on the receivables. The discount taken by the Factor generally ranges from 1%-3% for invoices collected in the normal course of business. Essentially, the Factor is providing you with funds, not on the basis of your creditworthiness, but on that that of your customers. So, even though your borrowing profile may not be ideal for a bank lender, as long as your customers are creditworthy, you can leverage that to establish a factoring line and obtain funds from a Factor.

For example, you may be a start-up, hotshot delivery service, but your customer could be Baker Hughes who may take 40 plus days to pay your invoices! You may not be a good prospect for a bank loan, but you may be an ideal prospect for factoring! AND, here’s the wonder of factoring, you do not take on the burden of bank debt, nor do you dilute your equity. Yes, you incur an expense in the form of a discount fee, but the expense does not come out of your pocket upfront and should be viewed as a cost of doing business. The simple truth is that factoring allows you to fulfill your main goal of getting financing in a timely manner and enables you to take advantage of a growth opportunity that you otherwise would lose. The same line of reasoning works for generating cash to support your ongoing business operations. Like most businesses, the majority of your cash is tied up in receivables (open invoices). Regardless of whether your need for funds is for payroll or inventory or other critical operating cost, factoring is an ideal way to get funds to cover it.

Establishing a factoring relationship with a Factor should be relatively simple. Remember, the Factor is mainly concerned about the credit worthiness of your customer accounts. So, in comparison to the underwriting process that a commercial bank is obligated to undertake when considering a loan, relatively little or no emphasis is placed by a Factor on approving you for a factoring line. Generally, you are required to authorize the Factor to take a priority security interest in your receivables. In considering factoring, if you have inadvertently pledged your receivables to a bank in connection with a loan for inventory or equipment, then all that would be required would be that the bank release its security interest in the receivables.

I think what you will find most surprising is that factoring is highly endorsed by financial professionals, including banks. Business clients have many needs, and good advice, be it from lawyers, accountants or bankers, should be enlightening. The disclaimer offered by most is that Factoring is more costly than traditional bank financing. This is true due to the effort expended by the Factor to ensure the receivables are collectable. Although, factoring may be more expensive, it is generally considered a short-term (6 months to 2 years) funding solution for small businesses. Factoring essentially enables a business to grow and buy time until it qualifies for traditional bank financing. Traditional bank financing and private investment are the irreplaceable cornerstones of corporate finance. The challenge is getting to the point where you can truly benefit from their value. Regardless of business size, from small to large, factoring should be considered as an alternative to private investor funds and traditional bank financing.

June 10, 2014
Is Invoice Factoring right for your business?
In today’s economy, business owners are all too familiar with the struggle to find the necessary capital to meet their operating needs or to finance business growth. While traditional small business financing options (such as business loans and lines of credit) are increasingly difficult to attain, invoice factoring has significantly less stringent approval requirements. This is why many business owners, especially owners of small businesses and startups, turn to invoice factoring companies for a financing solution. Is invoice factoring right for your company?

Accounts Receivable Factoring Boosts Business Growth

What is Invoice Factoring?

Invoice Factoring (also known as accounts receivable factoring) is the selling of outstanding invoices (accounts receivable) at a discount to a factoring company that provides immediate cash to your business. Your business receives a percentage of the invoice value upfront (known as the factoring advance), and the factoring company will take care of collecting the invoices for you. The factor will refund your business the remaining balance once all your clients have paid (minus a small factoring fee known as the discount rate).

Usually, the value assigned to the receivables depends on their age (i.e., a more current invoice will be worth more). Generally, invoice factoring is also known as accounts receivable financing, accounts receivable factoring, or accounts receivable funding.

How Does Factoring Work?

With invoice factoring, you are selling control of your invoices (accounts receivable), either in part or in full. The process works as follows:
1. In the normal course of business, you provide goods or services to your customers.
2. Your company invoices your clients for the goods or services they receive.
3. A factoring company purchases your open invoices. Once the invoices are verified as valid, the factoring company pays you a percentage of the invoiced amount immediately. This percentage is typically between 80 and 90%.
4. Customer payments are made directly to the factoring company. When necessary, the factoring company will chase invoice payments.
5. Once the factor has received all the payments from your clients, they will pay you the remaining invoice value, minus a small fee known as the factoring fee.
The Benefits of Invoice Factoring

Immediate increase in working capital: Factoring releases the cash a business typically has tied up in accounts receivable and makes it available for paying expenses or for funding growth.

Predictable cash flow: Eliminate the burden of waiting for payments from customers. Instead of waiting 30-90 days, a business can factor in its unpaid invoices and get paid immediately.

No new debt: Since factoring is not a loan, it doesn’t appear on the balance sheet as debt, nor does it negatively affect your credit score. Instead, it appears as more cash and fewer accounts receivable.

Offer better credit terms: Offer customers better payment terms without creating business cash flow problems. Normally, when a business factors their customers’ invoices, they receive cash right away regardless of the terms granted to their clients.

Go after big accounts: Offer credit terms demanded by large, slow-paying corporations without depleting cash.

Take advantage of supplier early-pay discounts: Most vendors offer discounts for early payment. With the predictable cash flow provided by factoring, a business can take advantage of early-pay discounts, improve its credit rating, and offset the cost of factoring all at the same time.

Spend more time focusing on growth and less time managing receivables: Since factoring companies are experts in accounts receivable management, they provide the capability for business owners to spend less time managing receivables and more time managing their business. Small business invoice factoring services free up the time and capital you need to grow your business.

Back office support: The cost of factoring is bound to be a topic of discussion for any company owner looking to enter a factoring partnership. However, the benefits of factoring (such as back office support) easily make the accounts receivable factoring rate seem like a small price to pay. Businesses can reduce the overhead costs associated with managing accounts receivable and the processing of payments. These are services that are usually included with invoice factoring services.

As all business owners are acutely aware, an uninterrupted source of cash is the most vital element in the survival of a business. It shows where a company may be headed. Instead of hoping everything will work out, business owners can enhance their cash flow with Invoice Factoring. When cash flow becomes predictable and controllable, the business is better positioned for continued business success. In today’s lending environment, where traditional financing sources are continuing to fade, invoice factoring presents a welcome alternative.

Taking the plunge into invoice factoring could mean the difference between the successful growth of a business and remaining stagnant. You should first consider all your options, and then spend the extra time needed to examine the factoring companies you are considering working with. Carefully review contracts and work hard to negotiate discounts. In the end, using invoice factoring can provide immediate cash flow to meet your business needs.

If you think invoice factoring might be the right financing solution for your business, or if you have more questions before you take the leap, contact Charter Capital today to learn more about how we can help you.
August 5, 2013
Do You Have An Alternative If Your Lender Becomes Uncomfortable With Your Credit?

Read this Entrepreneur Magazine article first (click here).

Unfortunately, Tara Olson’s story is not unique. Banks will often drop your line of credit if it does not meet certain profitability requirements. This, of course, can leave your business scrambling for cash if you are dependant on bank financing or a line of credit to help buffer your cash flow.

The Importance of Cash Flow
As with most businesses, cash flow is critical to ensure funds are available to meet your operating needs. Without effective cash flow management, a business faces several problem areas, such as cash shortages, inability to pay bills, bankruptcy, or even business failure.

Cash flow is one of the most vital elements in the survival of a business, and it shows where a company may be headed. Instead of depending on traditional bank financing, you can more easily manage your business cash flow with a FactorLine from Charter Capital. When you can predict or even control your cash flow, you are in a much better position for continued business success.

The Difference Factoring Makes
An increasingly popular way to help manage cash flow is factoring. Factoring (also known as Accounts Receivable Financing) is the practice of selling your accounts receivable (invoices) at a discount to another company like Charter Capital. You immediately get the money from Charter Capital and we become responsible for collecting on the invoices.

With factoring, you are free from many of the restrictions placed upon your business by traditional bank financing. Most importantly, with factoring, you are free to grow without having to give up equity or control of your business. This is because factoring Accounts Receivable is technically the sale of an asset, and the funding you receive from us is not debt, but a cash asset.

In today’s competitive marketplace, getting debt-free funding in the form of factoring can give businesses the edge they need to succeed.

September 8, 2009