Invoice factoring:Invoice factoring, also known as accounts receivable financing, is similar to a merchant cash advance in that it is not related to credit but a business’s sales. A business sells a lender (or « factor ») its uncollected accounts receivable for a significant portion of the total value upfront. The factor then works to collect the outstanding payments and keeps the remaining percentage of the total value not paid to the business. Invoice factoring is generally considered less risky than a merchant cash advance for one simple reason: It’s based on existing accounts receivable that have not yet been collected, while merchant cash advances are based on projected future sales rather than an existing asset.
Borrowers who require a working capital loan might need it for the same reasons a company seeks out a merchant cash advance, such as to pay employee wages, purchase equipment, acquire new properties or expand inventory. They are also commonly used by seasonal businesses or those with cyclical sales. [Read related article: How to Decide Which Type of Business Loan Is Right for You]
Epps said some lenders will ask for an overview of your business’s sales, so it’s important to collect several months’ worth of bank statements, balance sheets and tax returns. You will also need to provide your Employer Identification Number, your business mortgage or lease documentation, and your business credit score.В
FYI: One of the advantages of a working capital loan is that you can often apply online and receive approval for the loan much faster than you could for a traditional bank loan.
« Thanks to fintech, many working capital providers have online applications where you can securely provide information on yourself, your business, and some type of verification, like bank statements, credit card processing statements, connecting your accounting software or connecting your selling platforms, » said Alex Sklar, head of business development and strategic partnerships at Payability. « Depending on your business and the partner you chose, funding can happen as fast as 24 hours. »
Working capital loans tend to be less risky than merchant cash advances while serving similar purposes. However, it’s not uncommon for the qualifying requirements to be stricter, since working capital loans are often based on creditworthiness or a form of collateral more tangible than projected future sales. Here’s a closer look at the pros and cons of working capital loans.
Flexibility: Depending on the type of working capital loan, funding is relatively flexible. Certain loans, like equipment financing, are more restrictive, but lines of credit, short-term loans and invoice factoring can all be used to cover a wide range of costs.
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