Companies may need additional financing for a variety of reasons, from investing in capital assets to paying employees monthly wages. The universal approach does not apply to company loans, so it is important to consider the various loan options available before making a decision that is right for your business. Let’s look at some of the most popular alternatives to traditional loans for a company and consider the pros and cons of each.
The reasons for liquidity problems faced by small and medium enterprises are mainly customers who are late with payments, while the most vulnerable are those companies that depend on regular payments made by other companies. For companies of this kind, one of the two forms of invoice financing – invoicing or discounting invoices – may prove to be the most advantageous. In the case of the first option, you provide company invoices as soon as they are issued to a factoring company and you get a certain percentage (up to 100%) of the invoice amount in advance. Then the factoring company chases the client on your behalf. After paying the invoice, you will receive a refund of the difference with deduction of the agreed amount. If the idea of giving control over your sales book to a factoring company is not appealing to you, discounting invoices is a variation that allows you to keep more control.
The most important advantage of invoice financing is that you receive the payment immediately after invoice issue, which allows you to more effectively manage the flow of cash in your company. In addition, you save a lot of time and effort because you do not have to contact your clients directly, and at the same time, as interest only increases from unpaid invoices, your claims expire each time the customer makes a payment. Of course, the need to pay a company dealing with factoring means less profit for your business, and besides, you will be required to settle invoices that are unpaid anyway.
The option known as Cash Advance is that you get a certain amount in advance and repay it based on the percentage of profits from future sales transactions using credit cards. This means that you pay less in lean months, so that problems with financial liquidity are not so noticeable. As the companies providing this service are only interested in how long you run your business and sales transactions using credit cards, there is no requirement for security or capital in this case. The paperwork is not burdensome, and the decision to grant a loan is made quickly, so it is relatively easy to get access to cash within a few days of submitting the application. Nevertheless, a buyer’s advance is associated with a higher interest rate than traditional loans, and as the sector is not currently regulated, it is important to gather comprehensive information about companies in advance to avoid unlawful lenders.
Asset financing is an option that allows companies to use their existing assets to secure loans
Companies pay an initial deposit of 10-20% of their assets and then pay a monthly fee. Asset financing is often associated with renting with a purchase option or with leasing, and is a good solution for companies that do not have the cash to finance the investment purchase. Although it is quite easy to get these loans, you have to reckon with a relatively high interest rate and high fees.