How Factoring Supports Small Businesses with Limited Credit

Struggling to obtain small business funding? You’re not alone. Roughly half of all small businesses that apply for funding don’t have their needs met, according to the latest Small Business Credit Survey . Moreover, a significant number don’t even bother to apply because they know they aren’t going to meet the rigid criteria banks set. Thankfully, they’re not the only place to turn when you need funding. Factoring can be an incredibly useful tool for overcoming financial barriers in business, including those with limited credit and collateral. On this page, we’ll walk you through how factoring for small businesses works and cuts through the red tape you’re likely to experience with other funding solutions.

Overcoming Credit Challenges with Invoice Factoring for Small Business

It’s difficult for small businesses to qualify for traditional credit solutions. You’ll typically need a 680 or greater personal score, with more favorable terms going to those who have a score of 700 and up, or a FICO Small Business Scoring Service score (SBSS Score) of 155 or greater, per the U.S. Small Business Administration (SBA ). This is in addition to requirements related to time in business, cash flow, and more. Businesses that fall short in these respects may sometimes qualify for asset-based lending , but this requires having collateral that’s valuable enough to secure the loan.

Because of this, those adapting to limited credit options often try to do without or borrow from friends and family. However, there are many innovative funding solutions for SMEs that can help in spite of these challenges.

Factoring as an Alternative to Traditional Lending

If you’re exploring alternative financing for limited credit or managing cash flow challenges and don’t want to take on debt, invoice factoring may be an ideal solution, empowering you to take control of your financial situation.

Factoring Versus Traditional Loans

Rather than taking out a loan, which you must pay back with interest over time, factoring gives you an immediate cash injection through the sale of your unpaid receivables. The factoring company immediately pays you most of the invoice’s value and then collects payment from your client based on your invoicing terms. When your client pays the invoice, you receive the remaining sum minus a small fee for the service.

Factoring Versus Financing

Although “invoice factoring” and “invoice financing” are often used interchangeably, they’re distinct. With factoring, you sell your invoice. Invoice financing options, on the other hand, involve taking out a loan that uses your invoice as collateral.

Advantages of Invoice Factoring for Small Businesses

There are many invoice factoring benefits. We’ll review a few below.

No-Collateral Business Financing

You can leverage factoring without collateral. The invoice you’re factoring fills this role, allowing you to qualify without putting other assets on the line.

Improving Cash Flow Without Debt

Most cash flow solutions for small enterprises create debt, which often comes with high interest rates and may be challenging to pay off. Factoring is an advance on money you’ve already earned, and the balance is cleared when your client pays their invoice.

Streamlining Operations Through Factoring Services

Factoring is one of the few accessible funding for small companies that addresses back-office challenges. For instance, when you work with a factoring company like Viva Capital , we check the creditworthiness of your clients in advance to minimize your risk. We also address collections, which can save you hours of chasing invoices every week.

Building Business Credit with Factoring

You can also use factoring as a financial tool to help build your business credit. For instance, common credit-building strategies for businesses include things like paying suppliers early, which you can do with your factoring advances. It also helps you keep your debt to a minimum or allows you to pay off your debt, which can help you maintain a healthier credit score.

Factoring for Business Growth

Oftentimes, small businesses are hesitant to pivot, accept a large order, or take on a new client because they lack the capital to cover the upfront expenses. Factoring provides small business financial support to address these things so your business grows strong.

Navigating the Factoring Process

It’s easy to qualify for and leverage factoring. We’ll review the process below.

Steps to Secure Factoring for Your Business

You may be able to begin factoring within a few days of your application, provided you have common financial documents available and are responsive to your factoring company.

Step 1: Apply

Provide a few basic details about your business so the factoring company can help determine if factoring and the factor are a good fit for your needs.

Step 2: Provide Documentation

Share a few common financial documents with your factor so they can assess the fit, ensure your invoices qualify, and help you establish strong credit protocols.

Step 3: Submit Invoices

Factoring is flexible. You can choose to factor all your invoices, some, or just one. You can also factor all the time or just as needed.

Step 4: Get Paid

Receive most of your invoice’s value right away. If you’re working with Viva, you can opt for same-day payments or go with a standard accelerated process that has cash in your account within about two days.

Step 5: Receive Remaining Balance

Once your client pays, you’ll receive the remaining value of your invoice minus the factoring fee.

Understanding the Terms and Conditions of Factoring

As you evaluate your factoring contract, be on the lookout for terms that impact how the agreement works. A few are outlined below.

• Minimums: Some factoring companies have minimum volume requirements.
• Contract Length: Ensure you can leave the company whenever you decide you no longer need their services.
• Fees: Watch for fees that can increase your overall costs, such as processing fees, credit check fees, and termination fees.
• Recourse vs. Non-Recourse: Under recourse factoring agreements, you’re responsible for ensuring the factoring company receives payment if your client doesn’t pay their invoice. This is usually done by substituting an invoice of equal value, though each company and contract has different rules. With non-recourse, the factoring company takes the loss if your client doesn’t pay. This option tends to be more expensive and is, therefore, less popular among businesses.

Experience Financial Empowerment Through Factoring

Don’t let a lack of credit or collateral hold your business back. Accelerate your cash flow and grow through factoring. To learn more or get started, request a complimentary rate quote .

Original Article: How Factoring Supports Small Businesses with Limited Credit