The spooky season is upon us, but nothing causes a jump-scare quite like unpleasant surprises affecting your money and business. Whether you’re experiencing cash flow challenges and need money to pay vendors and fulfill payroll or can’t secure funds through traditional methods, a lack of capital can be truly frightening. When you cannot access traditional funding or wait for lengthy approval processes, you may consider alternative financing, which may be unfamiliar territory. We’re not one for delivering tricks, so we’ll offer insights into how you can make alternative funding options, such as invoice factoring, less daunting, especially if you have any of the following fears.
#1 The Fear of Losing Business
Some business owners may see alternative funding as a point of weakness rather than strength. This assumption may cause them to fear losing business if clients find out they’ve used non-traditional funding. However, many clients may already be familiar with alternative lending, like factoring, a well-established practice used by businesses across various industries. Additionally, the process typically operates independently from client interactions, so tasks run seamlessly. Consider that assured access to capital may instill confidence in clients about your business’s stability and growth potential.
#2 The Fear of Bad Credit
Limited or poor credit history doesn’t automatically lead to a decline with alternative financing. Alternative funding lenders differ from traditional lenders because they generally focus on a business’s potential, margins, goals, and other components beyond just credit. While credit is part of the puzzle, the collaborative process often increases a business’s chances of accessing alternative financing.
#3 The Fear of More Debt
Alternative lenders provide debt-free solutions like invoice factoring and asset-based lending that leverage your accounts receivable, inventory, equipment, or other assets. Additionally, when working with a provider, don’t confuse invoice factoring—when a factor purchases a portion of your outstanding invoices to provide capital—with invoice financing. In this type of loan, your invoices act as collateral in exchange for a cash advance.
#4 The Fear of the Fine Print
Fine print can be tricky if overlooked, so every business should thoroughly understand the various aspects of their contracts, whether they access traditional or alternative funding. Reputable lenders will walk you through your terms to ensure you know what you’re getting into. In alternative financing, be sure to review the following:
- The factor rate, which varies but is typically between 1% and 5%
- Any fees beyond the factor rate for things like prepayments or posting invoice checks too late, e.g., your contract may state “3 days to post” an invoice check, after which fees will incur
- The upfront advance percentage, which is the invoice amount that will be funded and is typically about 80%—so ensure you get sufficient funds to cover your needs
#5 The Fear of Dependency
Alternative funding may be more accessible to help a small business just starting or experiencing rapid growth. As your business advances, traditional options may become more cost-effective and suitable. Trusted alternative lenders recognize solutions like invoice factoring are for short-term capital needs on the way to traditional funding. Once you reach a certain business level, a reliable partner will guide you toward conventional options. They’ll also likely offer favorable terms, such as minimal or no prepayment penalties, and provide advice in your best interest without trapping you in an unfavorable situation.
Not so scary after all, right? Anytime you seek financing, ensure your team is transparent, trustworthy, and informative in communicating contract agreements and fees to help you reach your goals.