Jun 28, 2023
As a business owner, you know the importance of a steady cash flow to keep your operations running smoothly. Invoice factoring is a popular solution that many businesses turn to for their cash flow needs. But what if you need something beyond factoring?
In this blog, we'll explore other cash flow solutions that are available for B2B businesses and SMEs. From payables financing to supply chain financing, we'll explain how each type of cash flow financing works and highlight the pros and cons of factoring and discounting. We'll also dive into some alternatives to invoice factoring such as merchant cash advances and asset-based lending. Finally, we'll share key factors to consider upfront before choosing a solution that's right for your business.
What is the opposite of invoice factoring?
Invoice financing is the opposite of invoice factoring, where a business borrows money against unpaid invoices. Invoice financing is a short-term form of borrowing money to get a cash infusion into a business that’s waiting on outstanding payments from its customers.
There are two types of invoice financing—invoice factoring and invoice discounting. To learn more about invoice financing, read this detailed article.
Understanding cash flow financing
When looking for the right financing solution, it's essential to understand cash flow financing. Obtaining funding based on future projected cash flow can be an excellent alternative to traditional loans or using a factoring company.
Other types of financing options include lines of credit, asset-based lending, and merchant cash advances. Each option has unique pros and cons to consider before making a decision. Thorough research and comparison are crucial in finding the best fit for a business's financial needs.
The benefits of cash flow solutions
Cash flow solutions offer many benefits beyond traditional factoring methods. These financing options enable businesses to manage finances better while maintaining supplier relationships and avoiding late payment penalties. Cash flow solutions provide immediate cash without collateral or lengthy application processes. By improving their liquidity with these financing methods, companies can invest in growth opportunities and remain competitive.
For B2B businesses
Cash flow solutions are crucial for addressing the challenges that B2B businesses face due to slow-paying customers with potentially bad credit and seasonal revenue fluctuations. Financing methods like invoice factoring and asset-based lending can provide immediate liquidity without lengthy application processes or collateral requirements. Resolve, a complete net terms and credit management solution is another option. Unlike typical lenders or factoring companies, Resolve offers lower fees, simplifies the payment process, and acts as your partner to offer net terms.
Find out more about how Resolve differs from invoice factoring.
Additionally, early payment options like supplier finance and dynamic discounting can help mitigate supply chain risk. By optimizing cash flow through these solutions, organizations of all sizes can invest in growth opportunities and stay competitive in their respective industries.
For SMEs
Cash flow solutions offer SMEs rapid and effortless access to working capital without debt. The most popular solutions include invoice financing, asset-based lending, and merchant cash advances on the invoice amount. Merchant cash advances can be the simplest and most affordable solution for SMEs, who are dependent on cash flow as they grow and want to offer net terms to their customers. However, you should understand the pros and cons of offering net terms financing first.
By increasing a company's financial stability, creditworthiness, and competitive edge in the industry, these solutions are essential for small businesses and startups. It is crucial to select the best-fit solution based on your business needs and goals.
Types of cash flow financing
Cash flow solutions offer several ways for businesses to access working capital quickly without incurring debt. For instance, asset-based lending is a popular method where companies can borrow against their assets such as inventory or equipment.
Alternatively, purchase order financing provides an advance on purchase orders to fulfill larger orders while invoice financing enables companies to sell unpaid invoices for immediate cash.
1. Payables financing
Borrow money against outstanding invoices with payables financing. Ideal for businesses requiring immediate cash flow, it improves credit rating and payment terms with suppliers. Keep in mind the fees and interest rates while considering this financing solution.
2. Receivables financing
Businesses can opt for receivables financing as a financing solution where they can sell their outstanding invoices to a third-party finance company. The main benefit of this method is immediate cash flow without waiting for the payment due date and avoiding longer payment terms.
Receivables financing can be advantageous for small businesses with unpaid invoices or larger companies with supply chain risk. However, businesses need to consider interest rates, non-payment risks, fraudulent invoices, and costs associated with the service.
3. Supply chain financing
By offering the ordering company leverage to delay payments to suppliers, supply chain financing enhances a business's cash flow situation. This financing method helps improve relationships between stakeholders while also providing advantages such as negotiating better payment terms with vendors.
Pros and cons of factoring and discounting
When selecting a financing solution for your business's cash flow situation, there are various options available to you. When deciding between them, it’s essential to understand the pros and cons of each method.
Factoring can provide immediate cash flow by selling your outstanding invoices at a discounted rate, but it may lead to a loss of control over your customer base leading to a poor customer experience. Alternatively, discounting enables borrowing against future sales and maintaining control but at a potentially higher interest rate.
Factoring vs. invoice financing
When considering financing solutions for working capital, businesses often weigh factoring versus invoice financing. While both offer an injection of liquidity by monetizing unpaid invoices, factoring involves selling those invoices outright to a third party at a discounted rate, while invoice financing allows the business to borrow money against them. Factoring typically has stricter requirements and is more costly over time, whereas invoice financing offers better control over accounts receivable and more flexible payment terms.
Read More: All You Need to Know About Accounts Receivable Factoring Companies
Dynamic discounting vs. reverse factoring
Improving cash flow and managing supply chain risk are two challenges that many businesses face. Dynamic discounting and reverse factoring are financing solutions that offer benefits to both buyers and suppliers.
Dynamic discounting provides early payment discounts on supplier invoices in exchange for faster payments, while reverse factoring enables quick payment to suppliers by selling invoices to a third party. Careful consideration of each option's benefits and drawbacks is necessary before choosing the ideal solution.
Alternatives to invoice factoring
Businesses seeking financing solutions beyond invoice factoring can choose from a range of options to address their cash flow needs. For example, merchant cash advances may be ideal for those with high credit card sales, while asset-based lending offers the security of collateralized financing. Business lines of credit offer flexibility in borrowing and repayment, and crowdfunding and peer-to-peer lending may appeal to smaller companies seeking alternative funding sources.
Merchant cash advances
For businesses in need of quick cash flow solutions beyond invoice factoring, merchant cash advances are an excellent financing option. With a lump sum amount that is immediately available against future sales and quick approval time compared to traditional bank loans or invoice factoring.
Repayment terms are flexible and based on the business's sales. Careful consideration of financial needs is necessary as it comes with higher fees and interest rates. Resolve is an end-to-end platform for B2B payments and credit management. We help you manage your net terms cash flow with affordable cash advances.
Learn more: What is Advance Payment Invoicing and Why You Need It
Asset-based lending
Also referred to as asset-based finance (ABF), asset-based lending is an alternative financing solution that allows businesses to use their accounts receivable or inventory as collateral for securing loans.
ABF provides more flexibility than traditional factoring and is preferred by small businesses with seasonal sales or high inventory levels. Businesses can maintain control over their accounts receivables while avoiding the fees associated with factoring.
Key factors to consider before choosing a solution
To choose an appropriate cash flow financing solution for your business, consider its unique requirements, costs, flexibility offered by the provider, and reputation. Additionally, ascertain how quickly you can gain access to funds. You can opt for 'supply chain finance' or 'reverse factoring' to manage financial risks while improving working capital and liquidity. Ensure that you weigh all options carefully before making a decision.
Next steps: Get paid on your terms
There are several cash flow solutions available beyond invoice factoring. Cash flow financing offers more flexibility and tailored solutions to meet your business's unique needs. Whether you are a B2B business or an SME, options like payables financing, receivables financing, merchant cash advances, and supply chain financing can all improve your cash flow. As you weigh these up, consider factors such as interest rates, repayment terms to lenders, and the impact on your credit rating before making a decision.
Don't let cash flow problems hold your business back any longer—explore alternative solutions today! Talk to our payment specialist.
