Article: Business Loan Financing for Troubled Companies
Building a company in a tough credit environment is not an easy task. And many companies run into financial problems not necessarily because they lack opportunity – but rather because they lack business credit.
Obtaining any form of business financing during troubled times, especially a business loan is very difficult. During hard times, most institutions tend to tighten their credit standards making business loans inaccessible to all but the most credit worthy businesses. And in part, that is how many medium and smaller sized businesses run into trouble. Without easy access to financing, they become vulnerable.
There are some forms of business financing that are available to businesses – even businesses that have problems. For example, let’s examine a recurring situation in commercial transactions. Commonly, companies extend business credit to their clients and wait around 45 days after the sales to get paid for their products/services. By doing this, you are providing your client with a short term loan. Unfortunately, you don’t have an alternative. Most clients demand payment terms as a cost of doing business with them. This is a problem because few companies can afford to wait 45 days to get paid on their invoices.
There is a solution to this issue, which may work better that a business loan. It’s called invoice financing. An invoice financing arrangement provides you with an advance, secured by your invoice. Basically you get about 80% of its face value as a first installment, which enables provides liquidity to cover business expenses. The remainder 20%, less a service fee, is given to your company as soon as the invoice is paid for.
Most companies use invoice financing to cover cash flow shortfalls, at least initially. However, invoice financing’s potential comes from how it can help your firm grow. It’s a simple proposition. If you had clients that could pay their invoices in two days, how many would you take? Most owners would take as many as they can get. And that – quick payments – is what factoring financing really delivers.
The cost of invoice financing varies based on how much funding you need, for how long, and the payment quality of your clients. Generally speaking fees can range from 1.5% to 3.5% for 30 days, but they vary broadly based on many parameters.
Invoice financing does not work for everyone though – it only works for commercial sales. Specifically, it works for companies that sell on terms to other businesses and who can’t afford to wait to get paid.
Next article: Using Invoice Factoring as a Source of Quick Funding
Previous article: Why Invoice Financing Can be Better than a Business Loan
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