Funding maze - Cash advances or Invoice Factoring

Why you should choose invoice factoring over a cash advance

Which is better for your business? Cash advances or invoice factoring?

Funding maze - Cash advances or Invoice Factoring

As a business owner, it can feel like a constant maze trying to find working capital. You know how vital cash flow is for your operations, and it can impact everything — from regular expenses like payroll and supplier costs to large, capital purchases that help grow your business.

When you need extra cash for your business, you might think of turning to your bank first, but that doesn’t always work out. That’s where alternative financing options can help.

Will I go into debt?

One of these options, called a cash advance, is a fixed amount loan that can provide you an infusion of money — but the potential for a lot of debt.

Another option, invoice factoring, also gives you immediate access to the cash, but without all the debt looming over your head. Factoring gives you immediate access to the cash that’s tied up in your outstanding customer invoices — money that’s technically yours anyways. So, which option is better to keep your business on track: cash advances or factoring?

Agreement - Cash Advances or Invoice Factoring

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Cash advances and invoice factoring defined

  • A cash advance is a loan against your future sales. It’s generally a short-term solution for a fixed amount of money, and you have to pay it back to your lender. You can use a cash advance for any business purpose, such as a large one-time expense, capital cost or a special project. However, be aware that this can be a costly option.
  • Invoice factoring (also known as accounts receivable factoring or simply, factoring) is a financing option where you sell your unpaid invoices to a financing company (or factor) for faster payouts. You typically receive 80 to 85% of the outstanding invoice right away, and once the invoice is collected you’ll receive the remaining balance less a small portion the factor retains. No regular repayments required. You can use these funds to improve your cash flow and pay off any business expense, such as employee salaries, operational costs, debt repayment or suppliers.

Pro Tip: A good factor will be transparent and will not hide binding clauses in their contracts. Learn more about how to choose a good invoice factoring partner here.

As you can see, each option gets you cash in the short-term — however, there could be some key advantages of choosing one option over the other. The one you choose depends on your specific business situation.

 

Read part two now to learn how to compare invoice factoring and cash advances.

 

Ready to increase your regular cash flow? Turn your open invoices into working capital with Liquid Capital’s Invoice Factoring solution.


At Liquid Capital, we work with clients who operate businesses in a variety of industries and office structures — whether from busy downtown buildings, the manufacturing floor, on-the-go or from their home office space. We’re business people ourselves, and our company is built on a network of locally owned and operated Principal offices. Whenever you’re talking to Liquid Capital, you’re talking directly to your funding source and a fellow business person.

 

Featured image via Pexels.

Financements récents – Avril 2020

Financements récents – Avril 2020

 Financements récents – Avril 2020

Financial Challenges Facing Small Business Owners

3 Biggest Financial Challenges Facing Small Business Owners

There are many financial challenges facing small business owners, but with the right guidance and support, you can overcome them to grow and flourish.

Business financial challenges

When the going gets tough, it’s usually finance-related. Here are the three challenges you may be facing with your small business, and tips to overcome them.

1. Positive Cash Flow

Every small business knows that cash flow is a top priority. You need liquidity in order to channel funds into your other top strategic priorities.

According to Simon Dell at Business.com, this is a domino effect that not only impacts your business, but all the other businesses you work with.

“Personally I think the biggest challenge affecting any small business is cash flow. Every business, including mine, has suffered from, or suffers from issues with getting money in that is owed with them. The problem stems from a domino effect of one business having poor profitability earlier on in the chain that then starts to directly affect all the others, as many small businesses trade with other small business. Thus the situation compounds itself.”

The cash flow solution:

 Dell points out that this situation shouldn’t make you feel stuck in a cash flow rut.

“However there are a number of good solutions that can be implemented. The best two I have seen is invoice factoring – where another business loans you the value of the invoice that you’ve issued and pay you immediately. The second is to move your business, where possible, to a subscription business. If you can implement a direct bank transfer for services or goods at the start of the month, then that goes a long way to eliminating many cash flow issues.”

Learn much more about factoring terminology in the Ultimate Factoring Encyclopedia. This free resource includes every definition you’ll need to know when applying for invoice factoring and securing working capital.

 

2. Money Management

It’s hard to find a small business owner who hasn’t felt the pressure of operating their business effectively while also managing all the day-to-day financial management. From dealing with expenses, receipts and invoices all the way to tax-time issues and end-of-year reporting, these are the administrative duties that most SMBs dread.

The money management solution:

Investopedia offers a straightforward solution: get professional help.

“Money management becomes even more important when cash is flowing into the business and to the owner. Although handling business accounting and taxes may be within the capabilities of most business owners, professional help is usually a good idea. The complexity of a business’ books go up with each client and employee, so getting an assist on the book keeping can prevent it from becoming a reason not to expand.”

3. No Access to Funding for Growth

“Year after year, owners listed access to funding as one of their most formidable concerns facing the future of their businesses,” states Ryan Weaver in The Globe and Mail’s business growth column.

Finding the right funding solution is important, as your business should consider loan repayment schedules and rates when weighing the options. Weaver goes on to suggest that, “Hundreds of small business grants and loans programs exist to help businesses expand, subsidize hiring, and allow firms to take part in projects and activities proven to increase global competitiveness.”

However, many SMBs face further challenges when traditional grant programs, government funding and bank loans aren’t an option. Often, small businesses can be denied loans, or required to make a personal guarantee, when the company has a limited operating history, low gross margins or when their industry doesn’t fall within the bank’s criteria

The funding solution:

Finding a trusted alternative lender can be the perfect solution in these circumstances. And many SMBs find trusted lending partners that they can build ongoing relationships with in order to access funding with much more ease. This can be a big advantage when business demands become timely, such as when you must fulfill an unexpectedly large order or hire more staff for a new project.

Business News Daily explains that alternative lending has some major positives. “Your business doesn’t need to have a perfect financial status, there are few restrictions on what the money can be used for, and the loans can be approved almost instantly.”

Asset-based lending may also be an option for businesses in a large growth phase that have significant business assets such as inventory, machinery or real estate to leverage. Consider looking at all the alternative funding options that can bridge you to the next step in your business growth. Your business is not restricted to traditional lenders and a trusted alternative source can give your business growth the kick-start it needs.

 

Do you still have questions about business funding and overcoming financial challenges? Connect with us today!

 


About Liquid Capital

At Liquid Capital, we understand what it takes for small, medium, and emerging mid-market businesses to succeed – because we’re business people ourselves. Our company is built on a network of locally owned and operated Principal Offices, so whenever you’re talking to Liquid Capital you’re talking directly to your funding source and a fellow business person.