Business cash advances have made significant inroads into the small business lending market. Fast loans, quick turn-arounds, and easy approvals have made many online lenders an attractive source of funding for businesses that need financing. However, there's a lot of drawbacks to consider before you go get your one-day approved cash advance. In fact, borrowers should be interested to know that a better financing solution exists.
Business Cash Advances: Market Forces Meets Technology
At the heart of online lending is the premise that investors can make significant returns making use of technology in a market where businesses have limited choices for financing. The category of micro, small and medium-sized enterprises (SMEs) borrowers is extremely disadvantaged when obtaining financial resources to fund their business activities. In general, banks deem SME's as high risk because of low transparency. Small businesses don't have the history and stability that banks are normally accustomed to lending. This SME lending supply gap has resulted in the rise of the online lending marketplace for small business loans. Investors of online lenders are seizing the opportunity to fill this void in SME lending.
In addition to the market forces of SME lending, investors have tapped into available technology to help meet the demands and challenges created by bank lending practices. Today, online lenders create software-driven models in order to increase the transparency of SME lending - at least they hope! Investors use technology to speed transactions, improve loan underwriting and produce high volume returns for investors.
Banks rely on business history to project risk. Since small businesses are often young start-ups, banks don't have the necessary information to produce loans without taking on significant risk. Online lenders have introduced custom software algorithms to mitigate this risk by evaluating new metrics. Algorithms can inspect all sorts of online signals or business information to evaluate the likelihood of a particular business's risk. This mitigated risk (even if very slightly) allows better decision for SME lending.
Loan Repayments are also technology driven as lenders can now draft your repayments directly from your business checking account. As online lenders have direct access to your cash account, the associated risk of repayment drops dramatically.
High Volumes, Low Costs
Technology also provides investors the opportunity to produce high volumes of lending transactions at lower costs. Technology can reduce the service related tasks of producing loans that banks typically trust. Today, online lenders place an application online, run a software approval process and service your loans with automatic processes. This is a driving force that investors use to produce low cost, high volume transactions.
Investor Demands and Returns
The bottom line for online marketplace lenders is achieving high returns for their investors. Investors are typically private equity firms or high-worth individuals. Due to the market forces and technology factors, investors see a lucrative opportunity in SME lending.
Invoice Factoring: Meeting Small Business Financing Needs
Invoice factoring (or accounts receivable factoring) has served small businesses since the age of time. Invoice factoring has been the defacto financing alternative to SME bank financing. For decades, factoring companies have pitched their services to banks to help small businesses when banks turn them down.
What are the differences between online lenders and factoring companies? You'll see significant differences in both practice and philosophy.
1. People Relationships
Since invoice factoring is really a type of funding, rather than an approach to funding, it has many of the same characteristics of traditional bank lending. You'll find that factoring companies pride themselves on relationships, that is people relationships rather than technological features. Although factoring companies utilize technology in servicing their clients' funding processes, it's the personal touch that really makes factoring companies quite different from their counterpart online lenders.
With the help of FactoringClub, you can find a factoring company in your home state or city. You can quickly view the searches at the end of this article to find a factoring company in your city or state.
2. Business Knowledge
You'll quickly find factoring companies are people who know business. In fact, many owners and officers in factoring companies began in the banking industry. These people know what cash flow and income statements are all about. They know the many challenges that small business owners encounter, both in the market and within the business. Factoring companies are built on knowledgeable business people, often entrepreneurs themselves at one time.
3. Underlying Assets
Invoice factoring companies have the significant advantage of small business lending that precedes and goes beyond what a software algorithm can produce. Accounts receivable factoring is and always will rely on the underlying assets of the business, in particular, their accounts receivable. No transparency or historical data or online signals can replace the risk mitigation achieved by securing the accounts receivable assets of a small business borrower. It's baked into the successful financial method of invoice factoring that meets the needs of high-risk small businesses.
4. Client Value
One main reason that the factoring industry hasn't focused on large-scale marketing programs is they value the quality of clients, not just the quantity. Accounts receivable factoring involves time spent with clients, not online interfaces. Sure, factoring companies utilize computers and software technology to quicken and ensure processes, but the technology of doing business isn't the focus of doing business. People run businesses, not machines or software. Factoring companies know this well.
When you factor in the cost of online lending versus invoice factoring, the difference is astounding. I know an "online" factoring company that charges 30% more than other factoring companies. This particular online factoring company doesn't even provide the depth of services such as receivables collections that other factoring companies provide their clients.
Small businesses gain significant advantages with invoice factoring. Invoice factoring is more of a two-way street with person-to-person relationships. It's not about the next customer or client. It's about you and your business. You're a person, not a transaction. You're a client, not an account.
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