For companies that need to boost their working capital or cash flow position, the barriers to a traditional bank loan can seem insurmountable. This is where invoice factoring and unsecured loans come in, providing businesses with flexible finance faster and with fewer obstacles to surmount. Here, we take a closer look at invoice factoring and unsecured loans to consider the best choice for a cash-strapped business.

Invoice Factoring

Invoice factoring is a practical solution for businesses that have a predictable flow of payments from reliable customers but need a short-term cash flow boost. It’s a flexible form of finance as it fits the needs of the business at the time 0but can also grow in line with business sales. There are variations on the factoring theme, such as ‘spot factoring’ also known as ‘single invoice factoring’, which enables the business to factor an invoice without entering into a long-term relationship with the factoring company once it is paid. ‘Selective factoring’ is when the business chooses specific customer accounts to factor.

Factoring involves buying unpaid invoices at a discount from the business and making a profit when the invoice is paid in full by the customer. The factoring company typically pays the business in two instalments for the unpaid invoice: an advance of around 80% to 90% of its value, which frequently enters the business within 24 hours of raising the invoice. The second instalment or balance is paid once the invoice has been paid by the customer, minus service fees. As service fees are associated with each invoice that the company sells on to a factoring company, this type of finance is suitable for businesses that have a small number of high-value invoices.

The factoring company bases its funding decisions on the credit strength of the business’ customers rather than the creditworthiness or trading history of the company, which is how the banks assess risk. As long as the business has a steady stream of reliable customers, a bank statement with negative balances will not be a hurdle to using this type of finance. However, a personal guarantee from a company director may be required.

Unsecured Loans

Businesses looking for one-time funding, rather than flexible finance that grows with the sales of the business should consider unsecured business loans. That said, may lenders can extend or renew this credit line if the needs of the business change. Unsecured loans are typically approved for up to 90% of the business’ monthly sales and payment terms range from 3-12 months. In a similar vein to invoice factoring, unsecured loans can provide businesses with a fast cash injection as funds are deposited into the company account within 24 hours of approval.

Lenders collect the principal amount (the percentage of the monthly payment that reduces the amount owed on a loan) plus interest at a variable or fixed rate, depending on the terms of the agreement. Interest rates for an unsecured loan tend to be higher than those for secured loans as they are perceived to be a higher risk by the lender due to the lack of security. In short, the higher interest rates, smaller loan amounts and shorter terms offset the lack of security. This is why the majority of alternative finance providers, such as invoice finance or asset-based lending, secure an asset against the loan.

To qualify for an unsecured business loan, lenders consider the company’s trading history, turnover, growth projections and credit history to assess the interest rate, amount and term of the loan. This type of finance is a good

solution for established companies that have an excellent trading history. Another crucial benefit is that no assets or home are at risk.

Whether your business needs a short-term cash injection to ease cash flow pressures or sustained, flexible finance, please call 08000 746 757 or email for free and confidential advice from one of our professional advisers.

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