Qualification For Alternative Financing

Even though alternative financing is generally more expensive, it is a viable alternative in order to meet time-sensitive financial needs. Not all financing involves conventional loan institutions.

When a business is unable to qualify for conventional financing, one must consider alternatives such as invoice factoring, purchase order factoring or leasing. Some alternative financing actually offers advantages and flexibility not offered by conventional financing.

Invoice factoring is similar in principle to accepting credit cards. There are two main differences. Credit cards pay almost immediately in one installment whereas factoring involves two installments called and advance and a reserve. In either case, a small discount fee is charged. In the case of factoring, the discount comes out of the reserve.

Secondly, credit card financing can be done for business and consumers whereas factoring is only available for business to business or business to government. A business receives payments almost immediately after submission of an invoice. One of the purposes for accepting credit cards is to be able to offer financing to clients.

Factoring is usually more expensive than conventional financing. However, there are other benefits. Factoring is an off-balance sheet way of financing. Factoring is the sale of an invoice. An invoice becomes an asset after the products and/or services have been delivered and the invoice submitted. Thus, factoring is the sale of an asset to a third party.

When a growing company sets up a line of credit with a bank, often the line will not be adequate as the company grows. Thus, the company has to apply for an increase in the line of credit. With invoice factoring, the amount of funds available increases automatically as the company grows. Therefore, there is no need to apply for an increase.

The process of applying for invoice factoring is fairly simple. Some of the preliminary data needed to apply for factoring are two years and year to date financial reports, current aging accounts receivable and accounts payable, articles of incorporation or proof and percent of ownership, copy of drivers license of owners/principles/partners copy of contracts and an application. When a factoring company has those documents, the factoring company can accept or reject within a couple of business days.

Even if a company doesn't have the best of credit, it is still possible to qualify for invoice factoring. However, it is important for the clients to be creditworthy and the company to be viable. Factoring companies are most interested in the creditworthiness of clients of a business who are ultimately going to be responsible for paying the invoices.

When the company has been accepted for factoring invoices, a subsequent proposal will be sent containing the discount fee based on the type of invoices the company submits. Additional paper may be required. After the necessary paper work has been submitted, the company can expect to receive funding within ten business days.

All of the eligible outstanding invoices can be funded initially. Thereafter, only new invoices can be submitted. After the initial funding, the new invoices will be funded within twenty-four to thirty-six hours from when they have been submitted.

It is important to consider the time-value of money as the business is trying to grow and transition to being able to qualify for conventional financing. When the company has an opportunity of converting negative into positive cash flow, money is worth more to the company right away rather than when it is due.

In order for a company to build credit, accounts payable should be paid when due. If you have a company that has a deficit left by the interval between the accounts receivable cycle and the accounts payable cycle, it might be well worth your while to consider alternative financing. An analysis of the cash flow should be made to determine the cash flow deficiency.

Most factoring companies don't require a fee to determine if the business is eligible for invoice factoring. It is important, however to find a broker who can match the business with the right company to factor invoices in your particular type of industry. Factors specialize in the type of invoices they will factor. Let a broker find the perfect match.