Loans, Cash Advance or Factoring: How to Choose the Right Small Business Funding Option

According to a new survey from CreditCards.com, roughly 35 percent of small business owners say they have tapped personal funds – including personal credit cards and/or savings – to stay afloat. Other sources they have turned to as a lifeline include business credit cards, a business savings account or traditional loans. In fact, 70 percent shared they have either relied on one or more of those sources to keep their doors open during these uncertain economic times.

Unfortunately, while some small business owners have been successful securing external sources of funding, others have not. Many entrepreneurs have either been unable to secure the funds they need due to limited options or they are still waiting to receive their funding. Meanwhile, many others (71%) have already used the bulk of their Paycheck Protection Program (PPP) loan. As a result, a growing number of small business owners are considering alternative financing options like cash advances and invoice factoring.

Making sure you get the right financial product for your small business is more important than ever before – your business’ financial health and long-term success depends on it. So, how do you know whether you need a business loan, cash advance, or factoring? To help you determine which type of funding makes the most sense for your business, Security Business Capital has put together a guide so you can determine if one of these alternative financial solutions is right for you.

Small Business Loan

If you are considering alternative forms of financing, you have likely already discovered the problem with small business loans: they can be incredibly difficult to secure, they involve long wait times for funding and they add crippling debt to your balance sheet. The qualification process typically requires collateral, detailed financial records and a stellar credit history, among other requirements. As a result, many small businesses and startups usually struggle to secure business loans. With little to no business history, few assets available and/or no reliable record of cash flow, it is hard to prove your company is on track for growth.

Merchant Cash Advance

The biggest difference between a loan and a cash advance is that the latter is not a loan. A merchant cash advance is a purchase. The alternative lender offers your business a lump sum of cash in exchange for a set amount of your business’ future credit card sales. Your company then pays back the advance through installments, which are deducted as a set percentage of daily sales. The streamlined collections process, fast funding and straightforward requirements has made this alternative funding source very attractive to businesses that struggle to find cash solutions elsewhere. However, this form of financing is also associated with incredibly high rates and other costs.

Invoice Factoring

Also not a loan, factoring invoices involves selling your business’ outstanding invoices to a factoring company (the factor) at a discount. The factoring company then quickly advances the working capital you need against your unpaid accounts receivable. Once the factor receives payment from your customer, you receive the remaining balance of the invoice, minus any factoring fees. Rather than waiting 30, 60 or even 90 days to collect payment from your customers, you can secure up to 95 percent of an invoice’s value in as little as 24 hours. One of the biggest benefits is that invoice factoring is structured as an ongoing solution designed to improve cash flow and grow with your business.

How to Target the Problem You Need to Solve?

The challenge for small business owners is understanding which option will best meet their immediate capital needs, without creating deeper, long-term financial issues. The first step is to ask yourself, “What problem am I trying to solve?”. Are you having trouble managing unexpected expenses? Do you need to boost cash flow to cover daily costs? Would extra capital enable you to invest in technology and purchase new equipment?

Once you define your problem, you can compare your funding options against the following metrics to help you make the best decision for your business:

Speed of funding 

Most financing options involve waiting weeks or even months from application to first funding – time businesses in need of working capital simply do not have. With invoice factoring, you can have cash on hand in as little as 24 hours.

Application process

Securing traditional lending involves wading through seemingly endless paperwork. Invoice factoring, on the other hand, requires significantly less paperwork, giving you faster access to your funds.

Growth potential

Unlike most traditional financing options, which require you to apply for a new advance to meet your new requirements, factoring offers unlimited funding potential; the amount available is only limited by the number of eligible invoices you have to factor. Thus, as your business grows, so does your line of credit.

Availability 

Most lenders require extensive business and credit history to be eligible for funding. Because invoice factoring is largely based on your customer’s credit, it opens the door to small business owners and startups that struggle to secure funding elsewhere.

Overall cost 

When you consider the impact on your company’s long-term financial health, the cost of business loans and cash advances is steep; your business is being weighed down by high interest rates and long-term costs that could have serious repercussions. Invoice factoring companies charge a small percentage of your invoice total, and their services do not add a burden of debt.

Effectiveness 

Invoice factoring is very effective at solving cash flow problems created by slow-paying customers. If you choose to, you can also secure additional help with other back-office tasks that lessen the burden of handling accounts receivable and collections and free up valuable time and resources.

Security Business Capital’s Invoice Factoring Services

More and more companies are utilizing invoice factoring services to maintain positive cash flow, avoid unnecessary debt, and carry them through changes and challenges. If you need to boost your small business’ cash flow, invoice factoring can help you find the financial stability you seek. Startups, small businesses, businesses facing cash flow gaps, and businesses experiencing rapid growth are just a few of the business types that successfully use invoice factoring to generate immediate capital.

Security Business Capital has built an experienced and dedicated team of individuals with years of experience in providing cash flow solutions that are both flexible and customizable. Our invoice factoring services allow your business to use unpaid invoices to generate cash in as little as 24 hours – without adding a burden of debt.

If you would like to learn more about how our invoice factoring services work and how our team at SBC can help your business grow, reach out today for a free quote and/or consultation.