Everything in the world of small business works much faster than it does in the big, corporate world. If a small business wants to grow, it needs to be versatile and able to meet the needs of clients quickly and efficiently. If a small business sees an opportunity, it needs to be able to quickly change gears and make that opportunity part of the company’s future.
Money is the lifeblood of every SME and it is critical that small businesses understand good funding practices if they want to be successful. There are a lot of funding options out there and small business owners need to know where each option fits into their plans for long-term success.
Bank Funding
Most small businesses use bank loans to get their operations off the ground and to help finance large projects. There are several issues with banks that can make them an inefficient source for operational funding. For one thing, banks can take a very long time to make decisions, and, in the case of daily expenses, an SME does not always have the luxury of waiting for an answer.
Banks also require either good credit or sufficient collateral to extend a small business the loan it needs. If a small business relies on bank funding for marketing and operational needs, then the limits of bank lending can run out over time and leave the company in a lurch for cash.
Outstanding Receivables Are An Important Part Of Small Business Funding
In an ideal world, a small business would pay for its regular operational costs using its outstanding receivables. Payroll, vendor bills, and daily expenses would all be paid from the cash flow that comes in from sales.
The issue here is that cash flow relies on customers to make their payments and that can be difficult to predict. Even when a customer pays its bills on time, the small business owner still has to wait up to 30 days for that cash and that does not help to address the daily expense needs of the entrepreneur.
Receivable Factoring Allows A Small Business To Leverage Its Invoiced Sales
The solution for a small business that is having cash flow issues is to get involved with a receivable factoring company. receivables factoring helps to create a sustained cash flow based on the invoiced sales that are generated. As long as the small business can supply invoices from clients that have acceptable credit, then a receivable factoring company can provide the cash it needs to pay its bills.
Invoice factoring is done without consideration to a small business’s credit rating or credit past. SMEs with tax liens or just coming out of bankruptcy can qualify for the kind of help that receivables factoring offers. These are the kinds of situations that banks avoid and these are the times when it is good to have a factoring company on a small business’ side.
The Process Is Seamless To The SME
As a point of comparison, let’s discuss the receivable factoring process versus getting funding from a bank. In the case of a bank, the small business owner has to take time out of his day to prepare paperwork for the bank to review as it considers the funding request. The consideration can take several days, or it can run into weeks. All the while, the small business manager is running up bills that it desperately needs to pay.
When the bank’s answer to a business loan or line of credit request finally does come back, it will be one of three possibilities:
- No
- Yes with the full amount
- Yes with a partial amount
Two of those scenarios are devastating to the SME. After waiting for a response, the small business may find out that it was rejected or that it only received part of the funding it needed. As the bills pile up, the small business owner must scramble to find more cash.
The process of receivable factoring is much simpler. The only application the small business owner has to fill out is the initial application for an account. Once the account is approved and set up, the small business can then submit outstanding receivables for consideration. It takes minutes to review a receivable and the cash can be transferred to the company account in hours.
The stark contrast in methods shows why receivables factoring is the only real solution for a small business that requires operational funding. Instead of waiting for an answer from a bank that could wind up being the answer a small business does not want to hear, that SME could be turning its invoices into cash and enjoying the benefits of its success.