How to borrow for your business when banks won’t lend

These days it is nearly impossible to keep a small business running with money drawn from your pocket. It is becoming more and more difficult for small business owners to secure funding through banks making it even more challenging.The reasons why banks decline professional loans to business owners are some of the following: Lack of consistent cash flow, insufficient collateral (a lack of sufficient collateral in SMB’s excludes them from obtaining financing because most loan applications require a viable source of collateral), income-to-debt ratio, select number of customer concentrations, inadequate credit, personal guarantees, insufficient history of operation, economic concerns with the company, or even categorizing under a weakening industry. One or more of the stated complications above can make or break your decision to begin borrowing from your business, also known as factoring.

There are ways to create consistent cash flow

Factoring is a method that businesses use to market their accounts receivable, or the money owed to the company by those outside of the company, to a third party commercial finance company also known as a “factor.” Factoring of account receivables is done so the company can gain revenue, cash, faster than it would be waiting a period of approximately 20-50 days for a customer payment. Other methods include invoice financing, which is when a third party agrees to purchase your invoice statements for a set fee. These third parties are known as invoice financiers who can either be independent or in contract with a bank or financial institution. This works when an invoice is raised a financier will buy out the debt owed to the company by the customer, the invoice financier makes a percentage of the cost available to the business up front. Then it is the invoice financier who collects the invoice directly from the customer when it is paid, once they have received payment from the customer they make the remaining balance available for the company. The last step is to then pay the invoice financier a discount charge and a set amount of fees – which depends on the financier of your choosing.

Another method similar to invoice financing is invoice discounting. Invoice discounting isn’t when the financier manages your sales or debt collection from accounts, they lend you money against your invoices, but what makes them similar to the invoice financiers, who don’t do the job of discounting, is that a fee is made to the financier — this is usually an agreed percentage of their total worth. Therefore as the customer(s) pay their due invoices, the money goes directly to the invoice financier which reduces the amount you owe, allowing you to have the option of borrowing more money on new sales up to the originally agreed percentage. Although you’re responsible for collecting debts if you choose the method of invoice discounting it can be arranged confidentially so your customers aren’t required to be informed of this.

Community manager’s note: The author is a co-founder of The Singapore Receivables Exchange – a company that specializes in helping small and medium sized businesses preserve a consistent cash flow by invoice financing, invoice discounting, and the factoring of account receivables.