Last Updated on September 8, 2021
Your business is looking for a working capital solution, but you don’t know where to turn. You see banks advertising traditional loan rates and lines of credit, or you consider seeking an investment. That said, you may not be sure about taking on debt or losing equity, or due to certain situations, those means of funding may not be available to you. Maybe you need cash faster than the time it takes to secure a loan, because payroll and other expenses are due this week. That’s where alternative financing can help.
There’s a wide range of reasons that each kind of financing may or may not work for a certain business. We’re here to help guide you in the right direction when traditional financing doesn’t work. In this article, we’ll discuss if alternative financing might be right for you.
Alternative financing, often referred to as invoice factoring (make sure to read our guide on how does factoring work) or accounts receivable financing, is the process of selling your receivables in exchange for cash up front. While it’s generally more expensive than traditional financing, alternative financing comes with easier approval, faster turnaround, and zero impact on your credit. All of these things may seem appealing, but it’s not right for every business.
5 Signs You Should Consider Alternative Financing
You need to close the “customer payment gap”
What is the customer payment gap? It’s the difference in the date you invoice your customer and the day that customer pays the bill. For some businesses, that can be anywhere from 30-90 days, which is a long time to wait for payment.
Service industries are particularly good fits for alternative financing because, when they submit an invoice, the services have already been completed. For that reason, it’s particularly tough to wait 30-90 days for customer payment when those services were completed by Day 1. Businesses like staffing agencies, consultants, manufacturers and others must make payroll in the interim, leaving a major gap in cash flow between your invoice date and the date your expenses are due. This is a cycle that doesn’t often change, and can get worse and worse over time.
That’s when alternative financing helps most – offering cash flow you can put to work immediately after you submit an invoice to a customer. Instead of you, the factoring company who purchases your invoices waits for your customers to pay, giving you 80-90% of the cash up front. This solution eliminates the payment gap entirely.
Your business has limited operating history
If you run a startup or a company that hasn’t been in business long, it’s likely that a bank will not approve a traditional business loan. For that reason, many startups and young businesses choose alternative financing to boost working capital in the short term.
You have bad credit
Your credit score is a major factor in determining if a bank or other credit institution will give you a loan or line of credit. With fair/poor credit, a bank will often charge a high rate, or disapprove the loan altogether. That said, many successful businesses are run by people with subpar credit, as there are so many factors that can get you there.
With alternative financing, the factoring company cares about your customers creditworthiness, instead of yours. That’s because your customers are the ones who will ultimately be paying the factoring company. This makes getting approved significantly faster and easier than traditional lending.
You don’t want to take on debt
Alternative financing, or invoice factoring, isn’t a loan at all – it’s a sale transaction. The alternative financing provider is actually purchasing your invoices as an asset, then charging you a fee for giving you the cash up front while they wait to collect.
What does that mean for you? Means it does not impact your credit, and is not held against you as a lien. That helps you in the future, once your business has grown and you’re ready for traditional financing, by limiting any additional debt.
Your business has few assets to borrow against – or none at all.
Small services businesses, like a staffing or consulting agency, can start up without many hard assets. They don’t necessarily need real estate or heavy equipment, as the business is mainly selling the time and services of its employees. For that reason, these businesses do not have assets to borrow against, further limiting the availability of traditional lending.
With alternative financing, however, your outstanding invoices are your assets. Keep in mind, the factoring company will verify each invoice and run the credit of your customers (among other things) to determine that your receivables are legitimate. Once they’ve approved and funded the invoice, it’s as good as cash to your business.
Make sure you do your homework
With alternative financing, there are pros and cons. Make sure you’ve done your due diligence with determining which factoring company is right for your business. Some will try to hit you with hidden fees and float, or set mandatory minimums that make the real cost of financing significantly higher than expected.
If your business aligns with any or all of the situations we’ve laid out here, contact altLINE to see if an alternative financing option like invoice factoring may be a fit for your business.
Jim is the General Manager of altLINE by The Southern Bank. altLINE partners with lenders nationwide to provide invoice factoring and accounts receivable financing to their small and medium-sized business customers. altLINE is a direct bank lender and a division of The Southern Bank Company, a community bank originally founded in 1936.