Alternative Finance Guide

Businesses have slowly and steadily warmed up to different ways of raising funds to support their operations and meet their bottom-line needs. While banks have been the source of funding for businesses for ages, new, friendlier and more competitive financing methods are emerging that better meet the needs of the business and provide them with more timely financing solutions.

These alternative finance methods have allowed businesses locked out by the stringent bank requirements to access vital funding to facilitate their survival and growth. While these alternative financing methods are a welcome breath of fresh air, businesses need to understand what they are about and choose the right ones depending on their needs.

What is Alternative Financing?

Alternative financing involves obtaining funding outside the traditional banking and capital market systems. Fintechs have significantly impacted this option and widened the available options for businesses seeking financing.

Generally, alternative financing is more flexible than conventional loans and features quicker application and approval processes. With various alternative loans available, businesses can easily find better-tailored options to meet their needs.

Traditional banks and lenders often take weeks to approve or deny loan applications, whereas alternative lenders sometimes provide funding within a few days or hours. Their application processes are simpler, requiring only a credit score, tax returns, and bank statements instead of a detailed business plan and pro forma.

Alternative financing also offers smaller loans with customised terms and conditions to match the business's needs, while banks don’t provide small loans and usually have strict requirements.

With alternative lending, businesses can leverage their other assets, such as accounts receivable or credit card sales, instead of relying solely on credit or tangible assets like real estate.

What are Alternative Lenders?

Alternative lenders is a term that encompasses various lending models, including the following:

Direct Private Lenders

These are lenders who use their own funds to issue loans. They offer high flexibility in approving applications and offer various types of loans, including asset-backed ones like bridge loans. They can also provide low-value loans that conventional banks might not consider.

Marketplace Lenders

Also known as peer-to-peer lenders, this type of lender uses technological platforms to connect borrowers directly with investors, bypassing banks. They package loans from investors and deliver funding to borrowers, earning money through commissions and fees. With this type of alternative lending, your credit score is a huge determining factor.

Crowdfunding Platforms

Crowdfunding platforms or financing is an ideal option for businesses or startups with a prototype. This funding method involves the business obtaining funding from many individuals in small amounts. While effective, with no interest and no refund, the success of crowdfunding depends on effectively marketing the campaign and appealing to potential investors.

Types of Alternative Lending Available

The alternative lending space is innovative, with new types of business loans and financing options regularly introduced. Here are some standard alternative loans for small businesses:

Lines of Credit

An alternative lender extends a fixed amount of money, similar to a bank line of credit. Borrowers draw up to the fixed amount and only pay interest on the amount borrowed.

Short-term Loans

Loans scheduled for repayment within a year or less are common among alternative lenders. They are useful for working capital or covering one-time costs.

Instalment Loans

Installment loans provide a lump sum to the borrower that is repaid regularly until the principal plus interest is paid off. These loans from alternative lenders often have fixed payment amounts and interest rates, making them suitable for financing real estate, vehicles, and equipment.

Merchant Cash Advances

Offering a business cash upfront in exchange for future credit card sales. The advance is repaid through a percentage of daily credit card revenue, making it a quick funding option based on expected daily receipts.

Microloans

Low-value loans, typically less than $50,000, are designed for small businesses needing modest amounts to start or expand. These loans often have short repayment periods of just a few months.

Invoice Factoring

It involves selling outstanding accounts receivable to a third party (the "factor") at a discount. The business receives up to 90% of the invoice value upfront, and the factor can be engaged to help collect payments. We are the leading factoring company, so get in touch!

Bridge Loans

Short-term loans backed by an asset rather than a credit score are useful for transitions such as moving locations. They are often repaid within a year.

Equipment Financing

Loans used specifically to purchase business equipment serve as collateral. The equipment itself serves as collateral, allowing for lower rates and higher approval chances since the loan is tied to the equipment rather than personal credit or revenue.

Closing Remarks

The adoption of alternative financing is increasing due to its flexible repayment structures, versatile use of funds, and high approval rates. However, it's crucial to consider the costs and the lender's reputation and understand the terms and conditions before applying for any type of financing.

Cash Flow Management Tips

A healthy cash flow is one of the main indicators of a healthy business. However, it is also one of the most elusive factors in running a business. So much so that even profitable businesses can struggle to maintain a positive cash flow. Knowing how to improve cash flow can go a long way in ensuring your business can cover its running costs and keep up with new orders.

If you're struggling to maintain a positive cash flow, here are some great tips you should consider. They will help you improve your cash flow and make it easier and smoother to run your business.

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What is Cash Flow?

Cash flow is the amount that goes in and out of your business accounts within a specific period. Three types of cash flow highlight different financial health aspects, which you will find on a cash flow statement. These are:

  • Cash flow from operations – This is the money generated, spent or lost as you run the company’s core business activities.
  • Cash flow from investments: The company generates cash flow from purchasing and selling long-term investments such as buildings, property and other equipment.
  • Cash flow from financing: This is the cash flow obtained through cash and paying back debts to investors and creditors.

Is It Possible to be Cash Flow Negative?

A company can be cash flow negative if the sum of the three types of cash flows highlighted above is negative. When this happens, more cash is leaving the company than is coming in.

This doesn't necessarily mean that your business is making losses. Still, it can indicate looming financial trouble, which requires you to improve your cash flow to improve your business's current position and ensure that you can easily cater to the bottom line.

What is Cash Flow Management?

Cash flow management is crucial to every business's survival and smooth running. A positive cash flow indicates that your business generates enough cash to meet its expenses, invest in growth opportunities, and service its debt.

It's possible for a company to be profitable but has a negative cash flow, which can hinder its chances of scaling and is also one of the leading reasons that many startup businesses stagnate and eventually fail.

To avoid the same fate, it is crucial to have effective cash flow management practices which should meet the following objectives:

  • Help boost the business's liquidity, cut out unnecessary expenses and reduce operating costs.
  • Encourage the creation of emergency funds and streamlining cash flow, helping avert insolvency risks.
  • Keep a close eye on your spending, allocate resources more effectively and help with investment planning.

Cash Flow Management Tips in 5 Easy Steps

Cash flow management can be a broad topic with various areas that must be covered. But the journey towards a positive cash flow doesn't always have to be complicated. Making simple yet effective changes can greatly affect your liquidity and help you achieve a positive cash flow.

Modernise Sales Invoice Processing

Plugging invoicing inefficiencies is one of the best places to start when you are to improve your cash flow. Conventional invoicing methods are tedious and inefficient, making it hard to ensure your clients pay on time. You can drastically improve your cash flow by modernising your invoice processing to help you predict future cash flow.

Additional invoicing tips to help with cash flow management include:

Reduce late payments

Prolonged and delayed payments are a major cash flow issue for every business. Getting your clients to pay their invoices on time can improve your liquidity and fix many of your cash flow issues. You can achieve this by:

  • Following up on late payments promptly
  • Building strong client relations
  • Shortening the payment terms
  • Issue timely and accurate invoices
  • Offering your clients early payment discounts

Automate invoice processing

Automating sales invoices can help ease the invoicing process and make it easier to manage cash flow. It can help you send invoices on time and increase the chances of customers paying on time.

Ensure Financial Data Reliability

You can only make correct financial decisions if you have reliable and accurate data. You cannot rely on raw data because it doesn't create a picture of the financial health immediately and accurately. It also makes it harder for smaller teams to prepare reports on time. You can improve your financial data's reliability by:

Make financial forecasts more accurate

Invest in an automated system, such as accounting software, that can organise the dates and give you a clearer, more organized picture of your financial health. The software will provide easily digestible and reliable data.

Make financial reporting easier

You can also use technology to make financial reporting easier through automation. Automating will speed up the process and improve the accuracy of the financial reports.

Simplify Invoice Approval Workflows

Sometimes, the business's internal processes can create a cash flow bottleneck. Activities like manual data entry and inefficient processes with lengthy approval and acquisition processes can prolong the time it takes to send invoices and the time it takes for clients to pay them.

Consider having an efficient expense management workflow to enhance the company's cash-handling abilities.

You should also tighten expense control. The invoices should go through a single approval channel to allow managers to check what expenses are in the pipeline.

Create a Single Source of Information

Too many sources of information can create uncertainty, lead to the wrong financial decisions, and cause overestimation. You should set up clear audit trails and reduce back-and-forth emails.

Perform a Spend Analysis

Track how much you spend on every expense category. Cut back on non-essential and non-strategic spending and impose budget cuts where necessary without negatively impacting the business operations.

Summary

Cash flow management is crucial to the success and survival of the business. Effective cash management has many moving parts but can be simplified into two main categories: automation and invoice management. You should consider these key factors to improve your business's cash flow.

How to Finance Your Small Business

Financing is easily the greatest hurdle that most small businesses face. Conventional financing methods, like banks, are not interested in working with small businesses because most have not attained the minimum requirements to obtain financing from such institutions.

As a small business owner, you are left to come up with creative ways to finance your business to meet your clients' obligations and grow your business. Luckily, there is no shortage of unique funding options that you can consider as you build your credit score and get closer to getting conventional funding. Some of these financing methods can also serve your business for the long term, even after it has grown and become an established entity.

Overdrafts and Credits Cards

Overdrafts and credit cards are excellent options when you're looking for short-term financing to cover expenses and running costs for the business. If you're short on funds and require a financing option that doesn't require additional authorisation, these two might be a good solution for you.

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With some banks, your account will have an automatic overdraft facility, making it easy to access the funds when needed.

Typically, an overdraft offers lower interest rates than credit cards. But before going for an overdraft, you should consider the following:

  • Whether it has been automatically enabled in your account
  • What is the limit of the overdraw. The limit will depend on the bank and how much money you have in your account.
  • What are the interest rates on the overdraft facility, terms and conditions and due dates
  • Whether you want the overdraft facility to be linked to your credit card.

Credit cards are also an exceptional choice for short-term funding when you want quick cash to cover running costs for your small business. It's best to reserve credit cards for the more considerable expenses; their financing options have higher interest rates than overdrafts.

The conditions of the credit card vary depending on the lender. Some have interest-free days, which are an excellent option if you know you can repay the amount quickly. However, like overdrafts, there are considerations you should have in mind before picking credit cards, such as:

  • How many credit cards do you currently have, and your ability to repay
  • Interest rates and other cost comparisons between the different banks
  • Rewards and interest rates you might accrue on your card
  • Types of fees you need to pay when you have the card

Debt Financing

Debt financing is a more revolutionary method, though it has existed for some time. It entails borrowing money from external sources and is one of the more popular ways to finance your business.

This financing method is usually through bank loans or bonds. Bank loans are the most common for small businesses. However, banks require some sort of collateral they can possess if you fail to make timely payments. Some lenders also require a detailed business plan to help the lenders determine your financial situation. But you will still need to have assets.

Benefits of Debt Financing

  • Access to capital: Debt financing gives businesses access to the finances they need to remain operational and expand without giving up equity in the business.
  • Tax-deductible interest: The interest you pay on debt financing is tax deductible, reducing the overall cost of borrowing for the business.
  • Business control: With debt financing, you don't risk diluting the business's ownership or decision-making authority.

Disadvantages of Debt Financing

There are some downsides to debt financing as well, such as:

  • Repayment obligation: An interest is attached to the borrowed funds, which can burden the business if it falls during difficult times.
  • Interest costs: When you add up the interest rates, the overall cost of borrowing is higher than expected.
  • You need to have collateral: Some small businesses might not have desirable collateral to secure the funding they need.

Grants

Grants are usually from government agencies, non-profit organisations, and private institutions. They are funds used to support specific businesses or projects. There are different types of grants designed to help small businesses get up and running.

Unfortunately, applying for a grant is tedious and long, and the funds are never guaranteed. But once you secure the funds, you don't have to worry about repaying the money or tying up your assets as collateral.

Benefits of Grants

  • Grants are an excellent choice when your business specialises in research and development and other areas of interest, such as green initiatives and innovations.
  • Receiving a grant can enhance a business’s reputation and attract even more potential investors.

Disadvantages of Grants

  • Grants are extremely competitive, and there's a limited pool of funds for applicants.
  • Applicants must abide by the strict requirements and eligibility criteria, and not all business fields are covered.
  • The grant can only be used for specific projects.

Angel Investors

Angel investors are another way for small businesses to get funding. These are investors that want to invest in small and emerging businesses. The investor contributes a small amount of the capital, but it is more accessible than grants.

Angel investors can go beyond providing financial support to the business. They can also use their knowledge or connections to benefit the business. They can also offer guidance and serve on the business board, among other important roles.

However, the business owner must relinquish some business ownership in exchange for their investment and support. However, this is usually a smaller stake.

Closing Remarks

Other financing methods available for small businesses include crowdfunding, strategic entity investors, venture capitalism, and even sourcing funds from family and friends. Each of these financing methods has its benefits and downsides. Before committing to it, you should understand the type of financing that works best for you and the requirements and qualifications. Where possible, engage a legal expert to help you understand confusing areas to avoid any legal and ownership problems down the line.

End-of-Year Financial Tips

The end of the year is one of the best times to assess your business and its finances over the past year. It's also around the same time businesses start thinking about tax obligations, financial decisions and changes they should make over the next year to increase efficiency. It's a busy and confusing time for many businesses and employees. However, if you know what you should be doing, you can maximise the benefits while ensuring your employees feel secure and reassured.

Review your financial statement

The end of the year is a great time to take a good hard look at your financial statement. The financial statement is a good place to start because it provides you with vital information that you can use to make important decisions. However, you must keep up-to-date statements throughout the year to get the most from this financial statement.

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The statement can help you identify areas where you can cut back on spending or waste to improve your cash flow and income and make other adjustments.

Claim deductions

The financial statement gives you a clear picture of all the expenses for which you can claim deductions. Some common expenses you can claim deductions for include office supplies, travel and manufacturing equipment.

Deductions can be a great way to boost your bottom line. But most companies don't understand what deductions they can claim, ultimately leaving a decent amount of money on the table. The money you recover from deductions can be used to meet some of your financial obligations at the end of the year.

Consider asset purchases

Depending on the health of your financial accounts, you can consider purchasing some assets. The end of the year is one of the best times to consider purchasing new assets. Your financials should show you whether this is possible. If you're considering purchasing new assets, consider doing so before the end of the financial year because it allows you to claim depreciation on the assets in the current year, saving you money and taxes payable.

Understand changes in tax laws

Besides understanding your financials, the end of the year is also a good time to review tax laws and update yourself on any tax changes that affect your business. This will ensure you remain compliant with the relevant regulations and take advantage of any changes that could help you save some money and save you from the excessive fines and fees that may come from not filing your taxes correctly.

Plan for the next year

There's no better time to plan for the year ahead than at the end of the current year. After your financial review, you can make projections and plans for the next year. You can set new goals and develop a budget to help you reach new milestones. You can also spot areas of improvement that will help you improve your cash flow and cash flow management.

Reconcile your accounts

You should not forget to reconcile your accounts during your end-of-year financial analysis. This can help you identify discrepancies in your finances and help you identify loopholes. The second is ensuring your financials are accurate and the systems are working.

If you discover discrepancies, you can easily correct them and plug loopholes. If a budget is necessary, you can include it in the plans for the next financial year.

Take a closer look at your insurance policies

If you have any insurance policies, this is the time to give them a second look. If you want your business to be risk-averse, reconsidering your insurance policy is crucial to ensure ample coverage to protect your assets and mitigate risks. Not reconsidering your insurance can have catastrophic effects and expose you to liabilities in case of accidents or emergencies within the business premises.

Get professional advice

End-of-year reviews are the best time for professional advice on your finances and tax obligations. If you don't have a firm grasp of tax laws, seeking professional help can be helpful. An accountant or financial advisor might help lessen the burden, ensure your business is compliant, and avoid steep fines and penalties.

Keep accurate records

Your end-of-year financials review is only as effective as your yearly records. During this period, you can also audit your record-keeping and identify improvement areas. This will help you keep up-to-date records of all your financial transactions throughout the year.

Accurate records make it much easier to complete your tax returns, understand your finances, and ensure compliance with all the relevant regulations.

If keeping the right records is too much or you don't have time, you should consider having a bookkeeper on your payroll to help maintain the right records.

Closing Remarks

The end of the financial year review can be eye-opening for the business. It can help you determine whether you are making progress and if there are any pitfalls and loopholes in the business that you need to plug to improve your margins. It's also a moment of reckoning for some businesses.

You can also use this time to develop strategies for the next year and devise ways to take your business to the next level. These tips give you insight into how you can use the review period to set your business up for success in the coming year and what areas you should focus on when examining your financials.

Guide to Factoring of Account Receivables

Late-paying customers can present cash flow problems for cash-strapped businesses that need prompt invoice payments to stay afloat. For such businesses, loans don't make much sense because they take a long time to get approved and only add to the business's overhead.

The next best option is invoice factoring, which allows businesses to get invoices paid sooner and not have to chase down the customers offering discounts as a way of them paying ahead of time. Additionally, factoring allows them to save up on resources and better allocate them to the growth of the business.

Without exploring account receivables factoring, you could miss opportunities to grow and invest in your business's future.

What is Account Receivables Factoring?

Factoring is not a new or unproven concept. It has been around for some time but is [still] considered a modern method of financing. With accounts receivables factoring, the company sells unpaid invoices or accounts receivables to a third-party financial company known as the factor at a discount for immediate cash. When you factor in your accounts receivables, your company gets immediate payment for outstanding invoices to improve cash flow.

This saves the business from having to wait for the duration agreed on the invoice payment terms. Invoice factoring is not a loan or line of credit but involves the sale of receivables to a factor. It is also not a debt, does not affect equity, and does not depend solely on the client's credit but rather on the credit of the client's customers.

How Does Accounts Receivables Factoring Work?

The process of accounts receivables factoring follows several steps. The details of the process can change depending on the type of factoring you settle for, but the general steps are as follows:

  • Your business submits an invoice to the factoring company
  • The factoring company advances percentages, usually 80% to the seller
  • The factoring company holds the remaining percentage of the advance as security.
  • The factoring company receives the payment from the customer
  • The factoring company clears the remaining payment amount and completes the final payment to the seller, less their fees and other charges.

Once you submit the invoices, the factor will verify the details and ensure the invoices qualify. In most transactions, the factoring company advances up to 80% of the factored amount within a few hours of the invoice submission.

The factoring company then holds the remaining amount until the day the invoice is cleared. The fees are calculated as a discount percentage of the invoice value and can also include other interests.

Benefits of Account Receivables Factoring

Account receivables factoring can be beneficial to businesses on many levels. It's an unconventional financing method that allows the business to free up cash tied up in unpaid invoices without taking on more debt. Some of the benefits associated with account receivables factoring include:

  • It is a very simple form of commercial financing, and the main requirement is usually a client base with good credit.
  • Your credit history is not usually considered. So, if you have an adverse credit history or have been operating for some time, you can also benefit from your clients' good credit history.
  • After selling your invoice, the factor may be the ones that chase the payment. That means you may no longer have to worry about playing the role of the collector, and you can channel that energy to develop your business. The money will eventually come back to your business minus their fee. [NB: facilities can be full collection services / partnerships or primarily remain with you. Subject to facility guidelines].
  • Account receivable factoring helps businesses obtain immediate cash flow and capital for growth without taking on more debt through loans.

Disadvantages of Account Receivable Factoring

The greatest disadvantage of account receivable factoring is that there is a fee for using the service. The factoring company buys the invoice at discounted prices, meaning you will receive less money than you processed in your invoices.

Why You Should Consider Accounts Receivable Factoring

Improve customer service

Account receivable factoring can help companies provide better customer service by offering more flexible payment terms and reducing the time and effort required to collect customer payments.

With immediate access to cash, you can offer more flexible options to your customers by honouring or extending payment terms that enhance customer experience.

[If offered] outsourcing accounts receivable collections to a factoring company can reduce the time and resources and cost spent chasing customers for overdue payments and instead use those efforts to grow the business.

Easier application process

Another reason businesses should consider accounts receivable factoring is that it is easier to access than bank loans. The process doesn't require collateral or impact a business's credit rating. Accounts receivable factoring enables companies to control their finances and grow and contract in sync with the fluctuations of the business trading cycle[s].

Fast cash flow

Using this invoice financing method, you can free up revenue tied up in unpaid invoices. It makes it easier for the business to meet its obligations, which include overhead costs and payroll. Processing with factoring companies is usually fast, giving the business immediate access to cash flow without waiting for customers to pay invoices in full.

Additionally, accounts receivable factoring doesn't impact a business's credit rating or loan interest rate. Still, it can be a great way for the business to mend its credit rating by paying its suppliers on or ahead of time.

Reasons to Use Accounts Receivable Factoring

Accounts receivables can be useful when the business needs to improve its cash flow. Some great examples where factoring can be crucial include:

Maintaining off-season cash flow

Seasonal businesses with fluctuations in cash flow, such as holiday-related manufacturers or wholesale manufacturers, may need additional cash to cover operating expenses in the offseason. Accounts receivable factoring can be a reliable funding source to bridge the gap between slow and busy times of the year.

Facilitate business growth

Businesses looking to expand, move to a new location or launch a new product may require additional funding. Factoring accounts receivables helps them obtain the funding they need and eliminate cash flow concerns simultaneously.

Improve risk management

Invoice factoring can be great for risk management and can help avoid non-payment. By purchasing accounts receivables from businesses with strong credit ratings and reliable customers, finance companies can reduce exposure to bad debts.

What is the Cost of Accounts Receivable Factoring?

The cost of accounts receivable factoring depends on the factoring company and its terms. However, if you choose to factor with us, our fees are transparent upfront and have no hidden fees. We provide you with a full quote for the service, making it easier to know how much the service will cost before committing to it.

Invoice Factoring Vs Discounting

When considering the different methods of business financing, invoice factoring and discounting are preferred options because they allow the business to secure short-term financing without giving up any of its [fixed] assets or getting into debt.

They are quite similar financing methods with similar approaches, but slight differences can make one preferable over the other depending on your business's needs.

What is Invoice Factoring?

This business financing method leverages your account receivables and turns them into instant cash. The invoice factoring company takes up your unpaid invoices and gives you up to 80% of the value of the invoice upfront as they wait for the client to clear the invoice.

For many businesses, the cash flow pitfall is the time it takes clients to clear the invoice once they receive it. Invoice factoring can help fix this problem by helping you unlock most of the cash in the invoices sooner to keep up with your expenses.

The invoice factoring terms depend on the factoring company and your agreement with them. The company can advance up to 80% of the value of the invoice and the balance once they receive the full payment from your client, less their charges.

The factoring company usually manages or partners in credit control and processing invoice payments, which means your clients know the third party relationship.

Benefits of Invoice Factoring

There are several reasons why you should consider invoice factoring as a preferred business financing method, such as:

  • The factoring company looks after your sales ledger, manages the credit and controls the process. This saves your business from having an elaborate credit control unit and frees you up to continue running the business as the factoring company chases the outstanding payments. This can save vital resources for your business and reduce losses from bad debtors.
  • Factoring companies have enhanced credit checking processes, making you more likely to trade with customers who will pay on time. By leveraging such features, you can ensure you work with customers with positive credit ratings and can keep up with their invoices.
  • Invoice factoring can enhance your cash flow, allow you to pay your suppliers on time, and consequently negotiate better terms with them because of the timely payments.

The Downsides of Invoice Factoring

Invoice factoring also has downsides, which you should consider to give you a balanced view.

  • You might lose customers who know they are dealing with a factoring company and prefer to deal with you. However, if this rarely occurs you can always elect to keep them out of the facility as one option around that.
  • A factor’s presence may impact the customer’s impression of your business. This is more likely when the factor handles the customer badly. As with anything, choosing the right partner and asking for testimonials are needed here.
  • Invoice factoring comes at a cost. Management fees may take up to 2.5% of the turnover and other fees and interests that can dig into your profits.

What is Invoice Discounting?

Invoice discounting is another type of business finance using your account receivables. It is almost the same as borrowing against your unpaid invoices, but with a few differences.

With invoice discounting, you sell the invoice to the factoring company at a discount, and the factoring company sends you the agreed amount to your account.

The main difference is that with invoice discounting, the factoring company doesn't take over the responsibility of the collection of your sales ledger; you still have to chase the payments and process the invoices. As a result, customers may not be aware of your relationship with the lender. But this only works if you have a diligent accounting department that will keep up with the payments.

Benefits of Invoice Discounting

Some of the benefits of invoice discounting include the following:

  • The arrangement can be confidential, so your customers don't know about it or that you are borrowing against their invoices.
  • You manage the accounts, allowing you to build and maintain a customer bond.
  • The fees are more affordable than invoice factoring because there are no additional services with invoice discounting.
  • There is less risk, and you don't have to worry about the discounting company mishandling your customers.

The Downsides of Invoice Discounting

  • To be accepted by the invoice discounting lender, you need a strong in-house credit collection process and system. Such systems can be costly to set up and maintain.
  • Invoice discounters only want to work with businesses with a higher turnover to maximise their profits and businesses with a positive net worth on their balance sheet. However, these terms can vary depending on the provider you choose to work with.
  • Some businesses rely on invoice discounting as a source of cash and find it difficult to leave the arrangement without impacting their cash flow.

Differences Between Invoice Factoring and Discounting

From the descriptions, you can tell there are slight differences between invoice discounting and factoring. But there are more:

Visibility and Control

  • Factoring companies take over the management of your sales level and credit control. They chase customers on your behalf, allowing you to focus on running your business.
  • With invoice discounting, you maintain the full responsibility of chasing invoices and managing credit control, which can be tedious but allows the discounting company to maintain anonymity.

Adjustments to advances and the funds available

  • Invoice factoring provides you with funds for individual invoices. The funds you receive are adjusted daily.
  • Invoice discounting requires you to provide a monthly reconciliation of the account that reflects any changes in the level of debt to be disallowed. The finance provider can then make adjustments, which can be harder to manage.

Risk

  • Invoice factoring is less risky to the lender because they manage the credit aspect and may chase the invoice. This is why factoring is more popular and easier to get approved.
  • Invoice discounting is riskier for the lender. The lender has no direct contact with the debtors and no control over them. To reduce risks, discounters only work with companies with a positive balance sheet and a high net worth.

Which is Right For You?

Now that you know what each financing option offers, you can choose the one that suits your business needs best. When choosing, you must consider factors like your business's size and ability to manage your sales ledger, among other key considerations effectively.

If you’re a small business that has had problems collecting payments in the past, invoice factoring might be more beneficial because it saves you the trouble of chasing the payment and maintaining a credit control department, which can be expensive. But invoice discounting can also work for you if you already have such a department.

Type of Business Finance

Securing finances for your business is one way to ensure its future and growth. A steady flow of business finances ensures you can keep up with responsibilities such as working capital and fuel the business's growth.

For new businesses, financing can be the only way to keep the business afloat and give it a chance at succeeding. This is why you should understand business finance and the different avenues you can use to secure financing for your business.

What is Business Finance?

Business finance is the process of acquiring funds to aid in the operation of your business. It also extends to the administration and accountability of the funds you acquire for the business. Business finances can help your business stay on track, improve daily operations, achieve long-term objectives, and attract more business.

Types of Business Finance

There are two broad categories of business financing models that you can consider, with each option having multiple options underneath it. These two broad categories are:

  1. Debt finance
  2. Equity Finance

Debt Finance

Debt finance is when the business leverages its fixed or otherwise assets to raise capital. A business can acquire debt financing in different ways, but bank loans are the most common one. Under this financing method, your business is expected to repay the financed amount plus interest.

Types of Debt Finance

Bank loans

These are the most common types of debt finance and the most commonly used by businesses. Through a loan, the bank can access a lump sum that they can use to fund their operations or expansions. The business must have a strong credit rating and, in some cases, some type of asset to acquire this type of funding. The principle and interest of the loan must be paid within a specified period through regular payments.

Business credit cards

Business credit cards can support working capital and cover small business expenses. The cards are more accessible than a business loan but can have higher interest rates and fees, which can quickly add up, especially when you don't clear your balance every month. Additionally, business credit cards are limited in financing.

Invoice financing

This is a more flexible funding solution that allows your business to turn its outstanding sales invoices into cash. It's beneficial because the business doesn't have to go through the lengthy application and wait process involved with bank loans, and it is not limited to business credit cards. With invoice financing, the business can finance as many invoices as it needs and receive up to 80% of the value of the invoice as an advance. Most providers offering this service are efficient and can send the funds to the business's account in just a few hours. We are a factoring company that can also help!

Invoice financing might also be a good idea for businesses that don’t have assets yet or want to remain flexible and not tie down their assets as collateral.

Asset finance

Asset finance is a great option for businesses that want to purchase high-value assets. Businesses can consider this type of financing when they want to purchase equipment, vehicles, or real estate.

Asset financing is extremely rigid in terms of what the business can use the funds for. Common asset finance methods include hire purchase, operate-to-lease, and finance leasing arrangements.

In asset financing, the asset the business is buying acts as collateral, allowing the business to avoid putting up more collateral.

Trade finance

This is another type of debt finance that works for businesses in the export and import industries. With trade finance, the business can plug cash flow gaps and mitigate the risks of international trading. It can also be used for domestic trade and other solutions like supply chain finance.

The company uses a third party to finance the transaction for this type of financing, ensuring the supplier will be paid once the goods are shipped. Buyers can also use this type of financing to cover cash flow gaps while waiting for shipments.

Line of credit

The line of credit is a unique type of business finance that helps the business pay for emergencies and everyday expenses and even fund an expansion. It is a more flexible finance method that is always available when you need it. As you take out the funds, the credit limit decreases and increases when you repay the funds.

Merchant cash advance finance

This financing solution is available for businesses that process substantial volumes of customer card payments. The amount the business can access depends on the value of the card payments they process.

After securing funding, the lender will take a percentage of the payment each time you process a card payment. However, when considering this type of business finance, you should know that it comes with high-interest fees. 

Equity Finance

The other type of business finance is equity finance. Unlike debt financing, where a business uses collateral, such as an asset, equipment, or its credit rating, in equity finance, the business gives up a stake in exchange for funding. Another unique feature of equity finance is that there are no repayments or interests, but you must share some control and profits with those who give you the funding.

Types of equity funding include:

Crowdfunding

This funding method is common among startups and innovative companies. It doesn't require the company to have strong credit or collateral to secure financing. Instead, the business puts up a strong promotional campaign to attract the attention of investors who come together and invest in the company.

Venture capital

This business finance option is considered for businesses with high growth potential. It works for businesses that have already achieved some success and appeal to investors.

It can be a tedious financing process because investors will want to audit your business before investing in it. You will also need to always keep your accounts and business plan up to date.

Angel investors

Angel investor financing requires that you have a detailed business plan, up-to-date accounts, and growth potential to attract investors. You must also offer shares or part-ownership of your business in exchange for funding.

The upside with angel investors is that they work with you and use their money to fund investments. The investor also uses their experience and market connections to help your business grow.

Family and friends

You can also secure financing for your business from family, friends, and other well-wishers. While it's not recommended to mix family and business, this financing method can prove crucial when other financing methods are not forthcoming. It is an excellent financing method for startups with supportive family members.

Should you choose this type of financing, you should be clear about the financing terms and how you intend to repay it. Ensure you create a basic contract outlining the share of equity or repayment to the lender.

Conclusion

Business financing can be a juggernaut for entrepreneurs and established businesses. Choosing the right type of financing for your business will provide you with cash flow and flexible repayment terms that you can easily keep up with.

Non-Bank Lenders

When you're looking for funds, the bank is the first place you go to. However, taking a loan from a bank comes with many requirements and demands that most people and businesses hardly keep up with. Banks have been extremely hard-nosed in changing their traditional approach to loans and funding, which leaves many people and businesses in need and out in the cold.

As a result, businesses have had to look for alternative lending methods, which has led to an increase in the number of non-bank lenders. These are more flexible and cater to the needs of customers who don't qualify for bank loans or require customised loans that are more tailored to their needs.

Because the rules of operation with non-bank lenders are different from traditional banks, businesses are cautious about approaching them for loans. But with more understanding, it's possible to pick the right lenders to secure funding for your business. Factoring company can help!

What are Non-Bank Lenders?

Non-banker lenders are financing institutions other than banks, credit unions, or building societies. They are also not traditional, so the loan application process is likely to be much easier and faster.

The home loan industry is the most common for non-bank lenders. They provide mortgages by sourcing wholesale funds and lending them to their customers. This is one of the differences between banks and non-bank lenders. Banks source their funds from customer deposits and wholesale funding.

The concept of non-bank lending has been around for some time but took longer because borrowers are hesitant to secure funding. However, more people and businesses have acquired loans from lenders, which has increased their services. They have become a viable option for anyone looking to take out a loan who doesn't want to work with banks or doesn't qualify for a bank loan.

What Types of Loans Do Non-Bank Lenders Offer?

Non-bank lenders specialise in a wide range of lending options. Most of them are in the home loan market, but they can also offer loans for cars and businesses.

Typically, the lenders focus on industries underserved by the banking sector, including residential and commercial construction.

Regulation of Non-Bank Lending

One reason businesses are hesitant to work with non-bank lenders is that they believe they are not regulated. Most people are comfortable borrowing from banks because banks are considered safer because they are subject to a high amount of government scrutiny and regulations.

Non-lenders are also subject to various regulations and industry codes. These include ASIC laws, Australian Consumer Laws, National Consumer Credit Protection Laws and the ePayments Code.

The only difference in regulation between the two entities is that banks are subject to an additional layer of regulation administered by the Australian Prudential Regulatory Authority (APRA).

To some extent, non-bank lenders also regulate themselves by rewarding lenders who uphold the highest quality and services. The Australian Home Loan Awards are one of the distinguished awards set aside for this purpose.

Benefits of Non-Bank Lenders

Lower fees

Non-bank lenders understand they are under stiff competition from banks, and one way they attract consumers is by offering lower fees for their lending options. This is made possible by the fact that non-bank lenders don't have the large overheads the banks have, such as the huge number of staff and branches that add to the cost of running banks.

Lower interest rates

Like the fees, non-bank lenders may also have lower interest rates for the same reason: lower overheads. Non-bank lenders look to shake up the market with more competitive interest rates. However, some non-bank lenders may have higher fees, so you should vet your options and compare the rates and fees to ensure you get the best deal.

Another benefit of non-bank lending is that the lenders may be slower to pass on rate rises from the Reserve Bank of Australia, but this is not always the case.

Personalised Service

Non-bank lenders are huge on personalised service, especially because much of their business depends on referrals. This isn't the case with banks, especially when you go with the big four, which are notorious for providing a universal customer experience. Because non-bank lenders have smaller customer pools, they are more dedicated to customer attention and providing customised service.

Faster processing

Banks are notorious for having long processing and waiting times when you apply for funding. The lending process in a bank can take weeks or months, depending on the amount in question. With non-bank lenders, loan applications are done online and in record time. You can get your loan processed and deposited in a few days, making them ideal for companies looking for quick funding.

Flexibility

Non-bank lenders are more flexible with their lending options. They will check your credit history before approving the loan. They are open to discussing payment options and customising to your needs and abilities. Borrowers with lower credit scores can also benefit from this type of lending, and there is less documentation for the application.

Disadvantages of Non-Bank Lenders

Lack of Offset Accounts

There are some drawbacks to working with non-bank lenders. One of them is the lack of offset accounts, a key feature of banks because they are deposit-taking institutions. Non-bank lenders cannot do the same thing to the same extent.

Lack of branches

Customers trust banks because they have physical outlets where they can walk into when they have a problem. That physical, personal connection has a huge benefit on trust. Most non-bank lenders don't have a banking hall or physical offices, which can be a deterrent to most customers. Smaller non-bank lenders have no location, which can be a concern to some borrowers.

Less Trust

Non-bank lenders haven't done very well as far as trust is concerned. The lack of physical locations and long-established reputations of the major banks in Australia hasn't helped. There's still some scepticism around them, largely because they're not understood. But there really shouldn't be any concerns. When a non-bank lender fails, it is bought out by another, so there's always a chain of continuation.

Is a Non-Bank Lender Right for Me?

Like bank loans, non-bank lenders are not ideal for every situation. But there are some situations where they make perfect sense. If you're unsure whether a non-bank lender is right, you should consider professional advice. While at it, don't assume banks are a better option with lower rates. Some non-bank lenders might offer you better terms and should be considered.