By Greg Hitt, SVP, Head of Sales & Partnerships

When a business faces an immediate shortage of cash flow, it’s crucial to recognize that this doesn’t necessarily indicate financial distress. Instead, it could signal a need for strategic investments in equipment, raw materials, or additional staff simply to keep up with escalating demand. In addition, it could be the result of delayed customer payments. Invoices may take anywhere from 30 to 90 days to process, leaving businesses strapped for funds to fulfill new orders.

In light of these challenges, businesses are compelled to seek ways to bolster their working capital, especially when extending payment terms with vendors isn’t a feasible option. Traditional financing avenues of banks and government programs typically fall short due to lengthy and strict underwriting processes. This is where the significance of collaborating with alternative lenders comes to the forefront, as they can offer expedited access to a variety of working capital products, providing timely relief to businesses facing urgent financial needs.

Let’s delve into the intricacies of two common forms of working capital solutions offered by certain alternative lenders: term loans and invoice factoring.

Breaking Down Product Differences

Primary Use Cases

Term Loans – Best for one-off short-term purposes, such as acquiring new equipment, payroll or funding a large project.
Invoice Factoring – Best for reducing the overall working capital cycle by releasing cash tied up in accounts receivable.

Balance Sheet Impacts

Term Loans – When a business takes out a short-term loan, the loan will increase the short-term liabilities on the business’ balance sheet.
Invoice Factoring – When a business factor sales invoices, the factor buys the invoices at a discounted price. No liability is recorded on the balance sheet.

Financing Eligibility

Term Loans – Requires confidence in the business’ ability to repay the loan. Considers credit checks, business income and time in business, among other factors.
Invoice Factoring – Requires confidence in the creditworthiness of the business’ customers. Typically considers minimum value of sales invoices.

Funding Timelines

Term Loans – Generally 1-3 days to compile bank statements, financial documents and credit checks.
Invoice Factoring – Generally 4-5 days to compile copies of accounts, customer lists, assignments, verification and sample invoices.

Cash Availability

Term Loans – Cash availability is fixed and provided in one lump sum, regardless of how the business performs in the future.
Invoice Factoring – Cash availability naturally adjusts to the sales volume of the business.

Repayment Schedules

Term Loans – Consistent ongoing payments, typically either weekly, bi-weekly or monthly, made by the business that receives the funds.
Invoice Factoring – The business’ customers pay invoices directly to the factoring company, leaving no recourse to the business.

Cost Structures

Term Loans – The lender charges the business an origination fee and an interest rate.
Invoice Factoring – The factor buys invoices and advances funds to the business, less a small factor fee once the invoices are paid.

The Benefits for Business Clients

As you can see, both products are equipped with different use cases and structures and sometimes it can be difficult for businesses to identity which product is most suitable for their situation. In some cases, a combination of the two products may be the appropriate solution based on their unique needs. This is where working with a financial institution that provides both short-term loans in conjunction with invoice factoring comes in handy for small businesses. Consider the following benefits.

Solves Immediate & Long-Term Needs

Short-term loans and invoice factoring solutions are not mutually exclusive. As mentioned, they can be used together to support sustainable business growth. For immediate growth opportunities, short-term loans are often the best solution. Factoring invoices can accelerate access to future receivables, increasing liquidity and cash flow to fund daily operations. When businesses utilize these two products from the same lending institution, they can leverage multiple products tailored to their unique needs. For example, a short-term loan can be used to fund a new services contract or purchase order. Once an invoice is generated, the business can factor that invoice, pay off the loan and net the difference.

Enables Growth Alongside Partners

Working closely with lenders that offer multiple products is a smart move for businesses seeking to achieve long-term financial stability and growth. By cultivating these relationships, businesses are in a better position to be working with a financial institution that understands its unique needs, enabling them to provide more personalized financial solutions and favorable terms. In addition, rather than having multiple financial institution relationships for different financing needs, a business client can more efficiently access funding from a single institution that fully comprehends its business model, financial situation and overall credit strength. For example, business assets (i.e., factored invoices) can provide security on the credit (i.e., term loan) side when it comes to underwriting.

The Benefits for Financial Institutions

Businesses can gain a competitive advantage by accessing customized financing at the opportune moment from a specialized institution offering both products. Similarly, financial institutions specializing in these products can further capitalize on additional benefits. This synergy enables financial institutions and their referral partners to strengthen their position as the premier resource, emphasizing market distinctiveness, financial well-being and overall credit strength.

Empowers Market Differentiation

Offering short-term loans and invoice factoring enables financing institutions to craft a distinctive value proposition geared towards borrowers and referral partners alike. This multifaceted approach broadens the institution’s appeal across diverse audience segments, including those with limited credit backgrounds or facing challenges in obtaining conventional financing. Moreover, businesses and referral partners are more likely to opt for a singular, enduring partnership rather than managing multiple relationships. This strategic advantage allows institutions to stand out in the market, fostering stronger and longer term connections. By addressing a wider spectrum of financial needs, institutions can position themselves as reliable, comprehensive solutions providers, further enhancing their market differentiation and competitive edge.

Enhances Visibility Into Financial Health

Access to both asset and credit information empowers financial institutions to make well-informed decisions regarding the financial well-being of their clients. This comprehensive understanding of a business’ financial health not only allows for more accurate risk assessments but it also aids in the identification of potential credit risks. Consequently, financial institutions can develop more robust financing strategies, leading to enhanced risk management and increased success in meeting the financial needs of their clients. By leveraging these insights, lenders can proactively tailor their offerings to better match the specific financial circumstances of their clients.

The ability to navigate access to working capital is not just a competitive advantage, but a critical necessity in today’s fast-paced business environment. Offering business term loans in conjunction with invoice factoring solutions can be beneficial for small businesses and financing institutions. While short-term loans can offer immediate funding for businesses, invoice factoring can enable sustained business growth and facilitate access to increased liquidity. As a result, businesses can establish a reliable lending relationship with a singular financing institution that can provide them with the financial support they need when they need it, boosting their longevity and success.

**About the Author:**

Greg Hitt | SVP, Head of Sales & Partnerships at Breakout Finance.

With over 15 years of impressive expertise in sales, Greg Hitt embodies energetic leadership and adept business strategies. Specializing in both B2B and B2C sales and seasoned in the finance and fintech sectors, Greg currently services as Senior Vice President, Head of Sales & Partnerships at Breakout Finance. His responsibilities include sharpening Breakout’s competitive edge through strategic alliances and technology partnerships, while championing superior customer service. Greg commits his free time to family, his two rescue dogs, golf and travel. A graduate from Tulane University, his broad experience has honed his talent for driving innovative sales initiatives, propelling record growth and spearheading revenue generation at prominent companies like Dext and Stone Street Capital.

Benefits of the Powerful Combination of Term Loans & Factoring