When you need working capital without delay, borrowing against your unpaid invoices is a short-term cash flow solution worth considering. By FINSYNC Waiting 30, 60 or even 90 days to collect on goods and services rendered is challenging enough for small businesses, without the added stress of late payments. Unfortunately, delayed payments are all too common, with one in every 10 invoices paid late. While there are several steps you can take to get paid faster, sometimes your business needs the funds you’re owed right away. So what can you do when you need working capital for immediate expenses, and can’t wait to collect on unpaid invoices? Enter invoice financing, also known as accounts receivable financing. This type of loan allows you to borrow money against the amount your customers owe you. In other words, you can finance your unpaid invoices to get the cash you’re due now — without having to wait for your customer to make the payment. How It Works When you finance an unpaid invoice, you’re essentially getting a cash advance on the invoice, which serves as collateral. So what does this convenience cost you? You’ll pay the lender a percentage of the invoice in return for the loan. Lenders generally advance around 85 percent of your invoice right away, and you’re paid the remaining 15 percent once your customer pays their invoice. There’s often a processing fee, plus a percentage that’s generally calculated on a weekly basis (somewhere around 1 percent per month). The longer it takes your customers to pay their invoice, the more interest you’ll pay. When to Consider Invoice Financing Invoice financing offers a short-term solution to cash flow issues. It’s an option to consider when you need cash immediately, and can’t afford to wait for your customers to pay their invoices. This type of financing often makes sense for companies that face long payment cycles, or for seasonal business swings. Whether you need funds to cover operating costs, pay your employees or support a growth opportunity, invoice financing is a fast, convenient way to access cash. How fast? Many accounts receivable loans are processed in as little as a day, and with FINSYNC you can turn your invoices into cash in just one click. Beyond the speed and simplicity with which you can access funds, invoice financing is worth considering for startups and businesses that may have a difficult time securing other types of loans. With invoice financing, your customer’s credit score is given more weight than your own. In stark contrast to the approval process for traditional small business loans, accounts receivable lenders are looking mainly for unencumbered accounts receivable from clients with good credit. Your own credit history, cash flow and business outlook are secondary. Advantages of Invoice Financing Invoice financing offers many advantages, several of which we’ve already mentioned. They can be easier to qualify for than other types of loans, you get funds fast and approval is generally based on your customer’s credit rather than your own. Startups with a limited history often have an easier time qualifying for invoice financing, as there’s less emphasis on cash flow and revenue. Generally, three to six months of business history is sufficient, and the only collateral you’ll need is the invoice itself. The other obvious advantage is the time you’ll save waiting for payments. Getting the money you’re owed immediately can help you avoid cash flow issues and may even help you take advantage of timely growth opportunities. Other Factors to Consider When you factor an invoice, your client is usually notified — which can be uncomfortable for both you and your client. With FINSYNC’s invoice financing, your customer will never be informed about the transaction, as we are also a payment processor. Invoice financing can be more expensive than other types of loans. The rates and fees tend to be higher in return for fast, easy access to cash. They can also be somewhat unpredictable, as the fees are based on the time it takes for the invoice to be paid. Repayment terms are often shorter for invoice financing, generally around 12 weeks. And don’t forget that you’re still dependent upon your customer’s payment; if they don’t pay you, it’s still your responsibility to pay back the loan. Keep costs down and minimize your risk by repaying the loan quickly, and only finance invoices from clients with a solid repayment history.
From tightening payment terms to making it easier for customers to pay you, follow these five simple steps to speed up payment and protect your positive cash flow. By FINSYNC Cash flow is the lifeblood of any small business, as you no doubt are well aware. How else are you going to cover expenses, pay employees and keep things running — not to mention qualify for financing when you need it? Needless to say, overdue payments can put a serious kink in your cash flow. More than 80 percent of small business invoices in America are over 30 days past due. Not only that, the average small business is buried under more than $80,000 of unpaid invoices. And while late payments can cripple a small business, there are several steps you can take to bypass this common problem. Getting paid in a timely, reliable manner is one of the best ways to bolster your cash flow. We know what you’re thinking: easier said than done. Follow these five simple strategies to get paid faster in order to maintain a positive cash flow.
- Invoice Immediately
- Shorten Your Payment Terms
- Provide Incentives
- Offer Flexible Payment Options
- Automate with Invoicing Software
Boost your chances of getting approved for a small business loan and limit your liability by building up your business credit. By FINSYNC Are you still using personal accounts to run your small business? Separating your personal and business finances is a good idea for many reasons. For one, you don’t want your personal assets on the hook if your business falls on hard times (read: bankruptcy or a lawsuit). Do You Need Business Credit? While building business credit takes time, there are several benefits that are well worth the effort. Not only will you protect your personal credit and limit your risk, business credit can also help you get approved for a larger small business loan at a lower interest rate. With business credit, you’re also less likely to be asked for a personal guarantee. If you’re applying for a small business loan from a commercial bank or an SBA loan, you’ll need business credit. Online lenders are often more lenient when it comes to credit scores, and pay closer attention to cash flow as an indicator of your creditworthiness. Let’s not forget about personal credit. Most lenders will pull your personal credit — especially when they ask for a personal guarantee, or your business is new and you have yet to establish business credit. An excellent personal credit score will boost your chances of getting approved for a small business loan, while less-than-stellar credit can be a red flag for lenders. How to Establish Business Credit If you haven’t already done so, establishing a business entity that’s completely separate from your personal finances is the first step. If you’re currently operating as a sole proprietorship or general partnership, you’ll need to incorporate or form an LLC. Corporations and LLCs file their own tax returns and have a credit score that’s completely separate from your own. To incorporate, you’ll need to apply for a Federal Tax Identification Number (EIN), which is essentially like a social security number for your business. Be sure to open a business checking account in your legal business name and use it to pay a credit card that’s also in your business name — neither should be tied to your personal accounts. It’s also important to set up a business phone line in the name of your corporation, and get it listed in the 411 directory. Not only will this allow suppliers and lenders to verify your business during underwriting, it gives you an opportunity to build your credit history and boost your rating by paying your phone bill on time. Put any utilities in your business name as well for the same reason. You’ll also need to get registered with the business credit bureaus. Get a DUNS number from Dun and Bradstreet and register with business credit bureaus like Experian and Equifax. How to Build Business Credit Now that you’ve established your business credit, it’s time to build it up by applying for credit. Vendors and suppliers are an ideal place to start. Financing regular purchases, such as office supplies, coffee and marketing materials, is one of the most efficient ways to build your business credit. Secure a line of credit or negotiate payment terms from net-30 to net-60 days, and always pay your invoices on time. While on-time payments seem obvious, it’s worth noting that a late payment can impact your business credit score for as long as seven years. Once you establish a good relationship with your vendors, you can work your way up to revolving credit lines. Note that not all vendors report to credit bureaus, so check your credit reports and make sure to open accounts with a few vendors that report to a variety of commercial credit reporting agencies. Keep an Eye on Your Credit Report Errors on business credit reports are somewhat common, and can lower your credit rating. It pays to monitor your business credit reports with various agencies regularly so you can report any errors and have them corrected. Remember to be patient. The longer your credit history, the higher your rating. What’s the fastest way to build your business credit? Once you’ve established accounts with vendors that report to the business credit bureaus, pay your bills on time, in full. The reward is worth the wait: You’ll have greater access to funding and save money with lower interest rates.
Need a Small Business Loan? Start thinking like a lender to boost your chances of success. Hint: Cash flow is king. By FINSYNC Ever been denied for a small business loan? You’re not alone. Rejection rates among online lenders and commercial banks range from 43 to 73 percent, depending on the lender and their appetite for risk. Perhaps you’ve been rejected without any guidance about what you can do to get approved. This is not uncommon. Nearly 25 percent of applicants denied for a loan report they have no idea why they were rejected. So what can you do to increase your chances of getting approved for a small business loan? Think like a lender and learn what they’re looking for. At their core, lenders are risk managers. When assessing your loan application, they’re measuring the level of risk associated with your ability to repay the loan based on the information you provide. Most lenders were taught to underwrite loans based on the “5 Cs” of credit: cash flow, cash balances, collateral, credit and character. Cash Flow The cash flow of your business is the single best indicator of your company’s ability to repay the principal amount of your loan plus interest within an agreed upon timeframe. Lenders want to see a solid history of net cash flow that can clearly satisfy the loan you’re applying for. Net cash flow is simply the amount of cash that’s available after you’ve paid all of your outstanding business expenses. From a loan approval standpoint, the operative words are “satisfactory history.” Some lenders want to see 12 to 24 months worth of history. Lenders who are willing to assume more risk will rely on just 90 days worth of bank transactions, which can often be verified online; this can lead to quicker decisions through advanced automation. Cash Balances In addition to positive cash flow, lenders want to see a history of your ability to maintain a positive bank balance. Ideally, they want to see a balance that’s increasing, which is evidence that you’re growing and getting good at managing cash flow. This is especially important if your business is subject to market swings or other dynamics that can lead to less predictable cash flow. Collateral (Use of Funds) Depending on the strength of your cash flow and cash balances, along with your business profile, lenders may want to know what you’ll be using the loan for. Investing in assets that increase sales and strengthen cash flow can be a compensating factor for weaker historical cash flow and balances. Depending on your operating history and cash flow, a lender may require an actual assessment of collateral prior to loan approval. This is especially true if you’re offering assets that appreciate, such as real estate. Assets that depreciate quickly, like equipment and inventory, won’t do much to strengthen your loan application. With this type of collateral, the lender will focus more on the cash flow of your business. Credit & Character (Business Profile) When it comes to lending decisions, your business profile is important. Most lenders require that you’ve been in business at least a year, though some will make an exception for younger companies if your business is getting traction and showing strong revenue growth. When assessing the credit and character of your business, lenders will also consider the industry you operate in, makeup of customers, history with vendors, and online reputation. Businesses operating in industries that are subject to market swings and scrutiny are considered higher risk than those with more predictable patterns and favorable coverage. A growing, diverse customer base with repeat customers represents less risk than a business with nascent revenue and no repeat customers. Lenders want to see a positive payment history with your vendors, as it leads them to believe they can expect the same from you. Likewise, if they see a negative history, they will be concerned the same will happen with them. Not many vendors report to the business credit report bureaus — be mindful of the ones that do. Good online reviews from customers and employees can strengthen your application, especially when you plan to use the funds to serve more customers and keep your team happy and growing. Your Future The “5 Cs” is a traditional assessment of credit based on where your business has been, but thankfully a growing number of lenders are using new technology to analyze where your business is going. This is good news, as it can help more businesses qualify for financing. While traditional lenders tend to make decisions based solely on your past cash flow, more lenders are starting to take future cash flow projections into account. Cash flow projections are an opportunity to show these lenders where you expect to be with the help of their funds, which may tip the scales in your favor. Consider this: If your current cash flow doesn’t support the loan repayment schedule for the amount you want to borrow, you’ll need to show the lender how your business will get to a place where you can comfortably make those payments. To be clear, we’re not saying that lenders are turning into venture investors. An operating history with positive cash flow will always be the most important factor for lenders. However, this new model allows you to combine a positive history with plausible projections to build credibility in the eyes of lenders so you can obtain the capital you’re looking for. Tools to Help In order to boost your chances of qualifying for a small business loan, your best bet is to start looking at your cash flow through the eyes of a lender. Getting a handle on your current cash flow and making future projections doesn’t have to be difficult. FINSYNC’s intuitive online tools can help you easily visualize, manage and project your company’s cash flow so you can gain insights that will optimize your chances of getting the best financing to grow your business. FINSYNC has a growing network of lenders who rely on its technology to make quick or automated decisions based on your past, present and projected cash flow. As your cash flow improves, your access to additional capital grows with you.