How to finance your business when the bank says No
Do you own a growing business that needs financing? If you are
like most business owners, whenever your business needs money
you head over to the bank. Unfortunately, as most small business
owners soon find out, most banks do not lend money to businesses
unless they have significant collateral and a history of
successful operations. This presents quite a challenge for
When banks are not an option, small business owners turn to what
is known as the alternative financing funding market. Although
the financing options discussed in this article fall under the
alternative financing category, they are actually quite widely
used and should be considered mainstream. Most major companies
(including public companies) have used this alternative
financing at one time or another during their growth history.
Most of the tools described in this article can only be used by
businesses that are already in operation, and whose main
requirement is working capital. Although startups can benefit
from these tools, the companies will need to be in operation for
a little while and have a growing list of clients.
General Invoice Factoring
Invoice factoring (also known as accounts receivable factoring) is ideal for business
owners who cannot afford to wait 30 to 90 days to get paid by
their clients. It allows a business to sell invoices from
commercial customers to a financing company for immediate
payment. The financing company buys the invoices at a discount
and waits for the customer to pay.
The main advantage of factoring your invoices is
that the financing company makes its decision using the credit
of the payer, rather than yours. That means that if you own a
small company that is doing business with a large credit worthy
company, you are almost certain to have the transaction
approved. Another advantage of factoring is that it does not
have set limits like lines of credit. The level of financing is
limited only by the amount you sell to credit worthy clients.
General factors can work with most industries, although there
are two main industry subspecialties – freight bill factoring
and medical factoring.
Freight Bill Invoice Factoring
Trucking companies tend to be very cash hungry
businesses. The owners need money to pay their drivers, pay
gasoline and pay suppliers. However, most trucking companies
also work with a high volume of freight invoices from credit worthy clients. That
makes freight bill factoring an ideal solution for their
cash flow issues. Just like in general factoring, the factoring
company buys the freight invoices from the trucking company for
immediate cash.. Furthermore, the risk for these types of
transactions is lower than in general factoring. This means that
trucking companies can qualify for preferential financing terms.
Most medical industry businesses (doctor’s offices, hospitals,
medical testing centers and medical supply companies) make the
bulk of their earnings by billing 3rd party insurance companies,
Medicare and Medicaid. Unfortunately, insurance companies are
notorious for paying their invoices in 30 to 90 days, creating
cash flow problems at the medical office. Factor
ing medical offices is a subspecialty of general factoring.
Given the complexities of the insurance industry, it usually
requires the participation of a factoring company with extensive
Generally speaking, the medica
l factoring company will provide you with financing based on
your NET collectables rather then your gross collectables. They
will also need to be part of the billing process, to ensure that
they finance the right amounts. Due to its complexity, medical
factoring is only accessible to medical businesses making at
least $100,000 a month. However, if your business qualifies for
it, you will find that it is a great tool to streamline your
cash flow and grow.
Purchase Order Funding (a.k.a PO Financing)
Most distributors and import/export companies tend to be very
cash hungry businesses, in part because of how the sales process
works. Usually, the process starts when the distributor gets a
purchase order (PO) from a client. They then purchase the items
from their supplier, who then drop ships it to the end customer.
This works well as long as the company has enough money to pay
the suppliers and wait for their clients to pay for the product.
However, sometimes a payment can take up to 60 or 90 days to
arrive, creating a big cash flow challenge for the distributor.
Other times, the company may become too successful and get a
purchase order that is too big for them to finance. In these
instances, the company should consider purchase order funding
financing. With PO financing, a finance company handles your supplier
payments and ensures that the goods are properly delivered. Once
the client pays for the product, the transaction is settled and
all parties are paid. PO funding is a product that truly allows you to grow
your company – sometimes exponentially – while using someone
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