28% of small business owners cited cash flow issues as a concern in the wake of the global pandemic, while 43% asked for new financing. Most turned to invoice factoring or accounts receivable financing during lean times, with the sector growing from $142 billion in 2020 to $147 billion in 2021. Reverse factoring is now also a popular option for customers who are looking for different ways to pay their invoices.
Although invoice factoring works for many small businesses, it doesn’t necessarily suit every business’ needs. Some business owners have found factoring fees prohibitive or the payment terms in the factoring agreement lopsided.
Since accounts receivable financing is not always the silver bullet business owners hope it will be, here are a few more beneficial alternatives to invoice factoring services.
Disadvantages of invoice factoring
Here are a few reasons why business owners avoid invoice factoring:
Invoice factoring is costly
The main pitfall of invoice factoring is the exorbitant factoring costs. Businesses should expect to give up anywhere between 1 to 5% of the invoice value as service fees. In such cases, you must grapple with whether the immediate cash received is worth the cost.
Invoice factoring can create more liabilities
It is vital to understand that you are still liable for unpaid invoices if you opt for the less costly option, recourse factoring. The invoice factoring company will advance you the cash, but you must provide a personal guarantee to repay them if the customer fails.
Although non-recourse factoring means the factoring company will assume the responsibility of tracking down late payments, the option attracts a more significant fee.
Invoice factoring means a lack of control
Businesses must hand over complete control of invoices to a factoring company. Most business owners are uncomfortable outsourcing their invoice management to another company. This can also lead to negative perceptions from the customers if a third party company is the one asking for payments.
8 alternatives to invoice factoring for your small business
Small business owners should not despair if they do not have access or want to use invoice factoring to finance their businesses. Here is a breakdown of a seven different alternative types of financing available to small businesses.
1. Invoice financing
With invoice financing, instead of waiting several days or weeks for outstanding invoices to clear, a business can acquire most of the value of the invoice amount from a lender at a fee.
Unlike invoice factoring, invoice financing offers a faster turnaround, access to quick cash, boosts credit sales, and poses no risks to assets. It is one of the best ways to ensure that your business has consistent cash flow.
You also can choose specific invoices to finance, an attractive option known as spot factoring. Usually, business owners sell an entire invoice to a third-party company at a discount. Invoice discounting is a common financial practice suitable for businesses that cannot wait for clients to clear their bills.
2. Merchant cash advances
A merchant cash advance is a type of business loan which can offer you access to immediate cash. This type of alternative financing lets the borrowing company pay back the cash advance to the lender using percentages deducted from customers’ card payments. One advantage of this financing method is that credit checks are no longer necessary.
Your creditworthiness is also not a factor, making it easier to acquire a loan for your business. The lender also doesn’t look into your bank account history, making it a suitable solution for a start-up. Additionally, you can use the money received for any of your operational business needs.
3. Purchase order or PO financing
Purchase order (PO) financing provides an alternative way to acquire working capital. Popular with inventory-based businesses, this funding option means a third-party lender will pay suppliers for goods you distribute or resell.
PO financing provides cash flow to help run the business without selling equity or taking on debts from bank loans. The difference between invoice financing and purchase order financing is that the former involves selling invoices for completed work.
PO financing also allows for a cash advance on goods ordered, but not yet delivered. This business financing model allows you to grow the business—by boosting sales and buying inventory, even with limited capital.
4. Lines of credit
A line of credit offers business owners access to a fixed amount of capital to solve a business’s short-term needs. Lines of credit can fund different working capital requirements, including:
Financing customer acquisition and marketing campaigns
Repairing critical business equipment
As a business owner, you can access either a secured or non-secured line of credit (LOC):
A secured business LOC requires a business to have specific assets available to use as collateral. Because these loans are short-term, lenders usually ask for short-term assets such as inventory and accounts receivable. Capital assets are unnecessary. In the case of late or default payments, the lender assumes ownership of any short-term collateral the business provided during the application process.
An unsecured LOC does not require specified assets as collateral. Because no collateral is necessary, the financing company will require a stronger credit score or profile. The lender will also need a positive business track record to support your application for an unsecured line of credit.
5. Cash flow loans
Cash flow loans, also called working capital loans, are used to finance growth initiaitives like hiring labour or conducting product research. This business financing option works to solve cash flow issues when a company no longer has access to a line of credit.
The advantage of this alternative to invoice factoring is that you don’t require any personal or business assets as collateral.
Bankers determine how much money to offer based on a business’s past and forecasted cash flow. They also look at the quality of accounts payable, accounts receivable, and inventory turnover. These loans also have a relatively short repayment period of four to eight years.
6. Business credit cards
Business credit cards are taken out on a business account, not a personal bank account. These cards help increase a business’s purchasing power. With a business credit card, you have access to a revolving line of credit with a fixed limit. Businesses can withdraw cash or make purchases with the card to meet the business’s short-term needs.
Business credit cards attract additional fees if not paid by billing cycle deadline. Note that the interest rate on these cards tend to be much higher than a regular bank loan.
However, business credit cards can be a better alternative to a traditional line of credit. As the application process for a credit card online or from the bank can be fast and straightforward.
7. Small Business Administration loans
The Small Business Administration(SBA) makes it easier for small businesses to get funding compared to a traditional bank. The SBA works by connecting small businesses to lenders within their local area. Business owners should look for competitive rates of less than 5% of the loan amount.
Newer solutions like Resolve provide win-win solutions for both a business owner and their customer. Resolve is the most popular B2B payments solutio for growing business-to-business companies. In addition to offering up to 90% advance payment on invoices from approved customers, Resolve provides a host of other benefits that help businesses increase their working capital with minimal risk.
Resolve also conducts fast, reliable, and discreet customer business credit checks to ensure that your customers who purchase on credit can can afford to pay their outstanding invoices.
Resolve also offers flexible payment options for your customers and will manage all of your net terms. By offering net terms-as-a-service, Resolve eliminates your headache and risk of managing traditional credit decisions (and really, your in-house team should not be doing business credit checks).
The bottom line: why Resolve is the best alternative to invoice factoring
Gone are the days when you only had access to a few financing options for your small business. You can now choose from financing options like invoice financing, merchant cash advance, small business loans, purchase order financing, and more.
Resolve is the most popular solution for growing B2B businesses looking for an invoicing factoring alternative. Resolve's software automates credit checks, underwriting, and the complete management of net terms. This ultimately helps companies improves their accounts receivable workflow, speed up invoice payment, strengthen customer relationships, and maximize revenue.
Ready to find out how to improve your credit processes, up your accounts receivable game, and grow your business with risk-free net terms? We offer free credit checks as part of our free trial. Request a demo with our team to find out more.