A very good question that all entrepreneurs should be asking themselves.
Get excited for the answers.
The life of an entrepreneur is not for the faint-hearted. You have to be extra strong through the tough times and most of the time, things get tough.
Good financial management is key when running a business, having a healthy cash flow is paramount and knowing how to obtain a positive cash flow consistently is true wisdom.
Credit Challenges Faced by SMEs
One of the greatest challenges faced by SMEs is opting for a business loan with poor credit scores or lack a credit history that is required by banks and other financial institutions as a prerequisite when acquiring a capital injection.
It is so easy to slip into poor credit ratings, and this most of the time demoralises business owners. They feel that once they fail on a credit payment, it is the end of the road for them, however, there are many business financing options available for small business owners that do not require a positive credit score.
For example, invoice discounting and invoice financing do not require credit checks because you are not including your debt in the transaction, you are using unpaid invoices that have been issued as collateral meaning that money is going to be received regardless of what your credit score is.
Your invoices leveraged against the money you borrow from invoice factoring lenders is the only factor they care about. Your credit situation has nothing to do with them, therefore, it is not an issue for factoring lenders.
Why invoice financing works
This is one of the best things about invoice financing. It is a way to develop healthy relationships with lenders because you are using your invoices as leverage in order to release funds as working capital required to cover business costs and get on with upcoming projects that require financing.
A factoring lender may check your credit history when analysing your bank statements, but the main points for them are how long you have been in business, how long your clients have been in business, and what their score is when it comes to settling outstanding invoices.
So if you are talking about credit scores when it comes to lenders, it is not about your credit score but about your client’s creditworthiness.
Another great aspect of invoice factoring is that it does not add additional debt to your business. The lender makes money by buying the unpaid invoices from you at a discounted rate.
Also, if you take the invoice factoring business funding option, you allow the lender to make use of their credit services, which means that if invoices are extremely late, the lender takes it upon themselves to contact your client to retrieve the money still owing.
This also happens with the agreement that the lender accepts the risk of any invoices that are not unpaid. However, lenders will not be too quick to lend you money unless they have done a careful analysis on the type of clients you deal with and what their financial and business situations are.
Your clients must be established for a certain number of years with a certain period of doing business with you and must also show that they do pay their invoices within the stipulated credit period, without any issues.
So if you are looking to receive a business loan in a quick transfer time without having to worry about poor credit or lack of credit and also, do not want to use your assets as collateral but do have a healthy financial state of credit owed to you, then invoice factoring sounds like the best alternative funding option for you.
To find out more about invoice factoring and how it can help your small business, please visit Funding Bay.
Get in touch with us at Funding Bay for your invoice financing needs.
Check out our invoice finance calculator here.
