invoice factoring Archives

How to Use a Business Loan to Hire Employees

by Vince Calio7 minutes / February 29, 2024

Needing new employees because your business is growing is a great spot to be

One of the most exciting times for any small business is when it has the opportunity to grow – be it from better-than-expected sales; the development of a new product or service; or physical expansion such as getting a bigger space or a second location. Business growth, however, usually requires the hiring of additional staff, which can be expensive.

Fortunately, small business owners have a wide array of financing options that can help them expand their staff and facilitate their growth plans. Depending on your credit score and the strength of your business plan, a small business loan, a business line of credit, or even an SBA loan can help you hire the team that you need to meet your growth expectations.

Types of Financing

If you’re looking to take your small business to the next level and need to hire additional employees, several types of financing options could be right for you depending on your specific situation.

SBA 7(a) loans

SBA 7(a) loans are perhaps the best financing option when it comes to growing your business and hiring new employees because they generally offer the lowest interest rates and are flexible when it comes to the duration of the loan. Take note, though, that the SBA does not directly administer the loans, rather, they guarantee a large portion of loans given by qualified lenders.

Keep in Mind: These loans require an excellent credit score, a strong business plan, and an excellent cash flow history. They can also take weeks to fund once you’ve been approved, so if you are planning to apply for an SBA 7(a) loan, make sure you have the qualifications beforehand and that you’re not in a hurry to receive the funds.

Traditional loans

Traditional loans, or term loans, are similar to SBA 7(a) loans but they aren’t guaranteed by the SBA. They are offered by both traditional banks and alternative lenders, and like the 7(a) loan, they offer a lump sum of cash upfront to be paid back over a predetermined time frame and a pre-agreed upon interest rate.

Keep in Mind: Traditional banks may require a business plan, especially if you’re borrowing for long-term growth, as well as excellent credit, and will charge an interest rate that is generally higher than a SBA 7(a) loan. An alternative lender won’t require a business plan and may grant you a loan with a lesser credit score than a bank, but if approved, will charge a higher cost of capital.

Business line of credit

A business line of credit is, perhaps, the most flexible financing tool for small business owners seeking to hire new employees as part of their growth plan. A line of credit gives you quick access to cash that can be used to hire new employees as your growth plan progresses – and you’re only charged interest on the amount you borrow.

Keep in Mind: A business line of credit may charge a higher interest rate than a bank loan, and payback and renewal terms can be complicated, so really examine the terms of the line of credit before you sign up for one. You may be able to get a higher line of credit and a lower interest rate with a traditional bank if you secure your line of credit with collateral.

Short-term Loans

Short-term loans, also known as working capital loans, are typically loans with a 6-month duration or less. These types of loans can help you quickly hire new employees as you grow. They are almost exclusively offered by alternative lenders, so the requirements for these loans are usually not as strict as for a bank loan.

Keep in Mind: Short-term loans often charge a higher interest rate than your standard bank loan. Additionally, if you believe a short-term loan is best for you, carefully research the lender, as there are some bad actors in the online lending space.

Define Your Needs Beforehand!

If you’re seeking to expand your business by hiring new employees, there are several types of lending products for you to consider. But, before you begin evaluating your different options, it’s important that you carefully define what your needs are. Doing so beforehand can help you determine factors such as the loan amount you are seeking, whether a traditional bank or online lender is best for you, and the type of financing you need.

The factors you need to define before you delve into the lending market are:

How many new employees do you need to hire and what will they cost? This seems straightforward, but keep in mind that you shouldn’t just consider what you’re going to pay them, you also need to factor in payroll taxes, whether they will be full-time, part-time, or contracted workers, and any benefits you may want to offer them. This should help you determine how much you need to borrow.
Do you have a strong growth plan? In other words, can you make a strong case that your growth plan will succeed with the addition of new employees? If you plan to apply for a business term loan with a traditional bank or go to an SBA lender for a SBA 7(a) loan, they are going to want to see a convincing business plan that demonstrates how you plan to grow your business and that you’re going to make money to cover the cost of your loan.
What is your credit score? The strength of your credit will be a determining factor in the cost of capital for your loan. Put simply, the higher your score, the lower the interest rate you’re going to have to pay, no matter what type of financing you’re seeking. Check your credit score with all three credit bureaus (Experian, Transunion, and Equifax), as well as your business score with Dun & Bradstreet. If it’s low, examine ways you can improve it, or determine if you have collateral in case a lender will only offer you a secured loan or line of credit.
How strong is your cash flow? If you’re seeking to hire temporary seasonal workers, that means your business probably has an uneven cash flow. If you decide to take out financing to pay for seasonal workers, make sure that your cash flow is strong enough during your busy season to justify taking on that debt.
What type of business do you own? The type of business you operate is important because some types of small businesses are considered riskier than others. Restaurants, transportation companies, and real estate brokerages are generally considered among the riskiest industries, and if your business fits in one of these industries, you may have trouble securing a loan with a reasonable interest rate. If you are in any of these industries, it’s especially important to make sure you have an excellent business plan, a strong cash flow and that you can demonstrate future success with your growth plan.

A great small business starts with great planning. Defining your needs before you look to financing will help you select the best financing option as well as keep your cash flow strong while you grow your team.

Vince Calio

Content Writer

Vince Calio has been a writer for Kapitus since 2021. Before that, he spent three years operating a dry-cleaning store in Rahway, NJ that he inherited before selling the business, so he’s familiar with the challenges of operating a small business. Prior to that, Vince spent 14 years as both a financial journalist and content writer, most notably with Institutional Investor News and Crain Communications.

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What is Non-Notification Factoring

Manage Your Money

by Brandon Wyson5 minutes / June 29, 2021

Financial Advisor with Client going over options.

Non-notification factoring is a type of invoice factoring arrangement between a business and their factor that limits the interaction between the factor and the customer as much as possible. There are a variety of reasons why a business may pursue a non-notification factoring deal, but the results for the business, factor and client are often the same as traditional factoring deals.

Invoice Factoring

Before we delve into how non-notification factoring differs from more traditional factoring, it is important to understand exactly what Invoice Factoring is.

Invoice factoring, sometimes referred to as receivables financing, is the process in which a financial company buys a business’s unpaid invoices for a percentage fee. Factoring massively expedites cashflow for participating businesses, as invoices from accounts receivables that would regularly take 30, 60, or even 120 days to become usable capital can be sold to a factor and quickly turned into cash. When a factor buys an unpaid invoice, they will pay up to 95% up front. The factor will then pay out the remaining percent, minus fees, to the business when the customer pays the invoice. Typically, once a business is approved for factoring, the factor is responsible for collecting on the original invoice meaning the factor, not the business, will then reach out to the customer to redirect collection. This final step functions differently in a non-notification factoring deal.

Normal Invoice Factoring Versus Non-Notification Factoring

Traditional invoice factoring agreements function near-identically for the business, but changes happen in the dealings between the factor and customer. Once a business and factor agree to a non-notification deal, all notifications sent from the factor to the customer are done through white-label forms or forms on the business’s branded stationary or email signature instead of the factor’s. This means that even though the customer is still corresponding with the factor when paying their invoice, it appears they are dealing with the original business.

To further conceal the factor’s identity, payments sent from the customer via postage will often be sent to a PO box instead of directly to the factor. Electronic deposits from a customer will also pay directly to the factor, but because all notifications are sent either with the business’s email signature or branded stationery, it will appear as though they are paying the business directly. Non-notification factoring is a service that attempts to make the invoice process appear more seamless to the customer. By paying invoices that appear to be directly from the business instead of a factor, customers are simply given a more streamlined version of their part of an invoice factoring deal.

Qualifying for Non-Notification Factoring

Traditional invoice factoring qualifications are less stringent compared to other financing options like loans and can be a good choice for businesses like subcontractors. When applying for factoring, a business’s credit score is not nearly as important as the credit scores of the customers who will eventually pay out the invoice. Non-notification factoring, however, will likely have several more requirements. Factors will often look for you to meet several criteria when choosing to make a non-notification deal with a business including:

2 years or more in business
Low risk of bankruptcy
Minimum invoicing rate of $250,000 per month
1 year or more of accounts receivables data
Credit-worthy clients
Your business must fall within services or manufacturing includings

Exact requirements will often vary depending on the factor a business chooses to partner with. When making a non-notification factoring deal, expect that a factor will consider at least some of the requirements listed above, and may have additional requirements not listed.

When to Consider Non-Notification Factoring

Non-notification factoring is a service specifically for the benefit of your customers, particularly when you don’t want them to know you are using a factoring company. Non-notification factoring can also improve a business’s relationship with a customer, as the business’s name and branding will be present for every step of the invoice process. Non-notification factoring may also help in the event a business and customer’s contract restricts the use of a factor. Such contracts usually bar a factor from sending notifications to the customer, so non-notification factoring often means a business can take advantage of the cash flow benefits of factoring and stay within the grounds of their contract. Businesses seeking a non-notification factoring deal because of contractual obligations will often need to share the contract with their factor.

Any time where a third-party contribution may hurt the relationship between a business and their customer, non-notification factoring may be an effective compromise. Non-notification deals, however, require a strong relationship between a business and their factor, as the factor must essentially act as the business when collecting for the invoice.

Weigh your Options and Speak to a Professional

Every financial situation is different. The most effective way to learn if you would benefit from a non-notification factoring deal or invoice factoring in general, is to speak to a lender or a financing professional. Invoice factoring is a massively helpful tool in increasing a business’s cash flow without the potential of debt brought on by a loan. If your arrangements with a customer could benefit from increased discretion or if you are interested in learning more about how a non-notification factoring deal may help you business, get in contact with a Kapitus specialist who can address your situation.

Brandon Wyson

Content Writer

Brandon Wyson is a professional writer, editor, and translator with more than eight years of experience across three continents. He became a full-time writer with Kapitus in 2021 after working as a local journalist for multiple publications in New York City and Boston. Before this, he worked as a translator for the Japanese entertainment industry. Today Brandon writes educational articles about small business interests.

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What Is Staffing Factoring And How Does It Work

Manage Your Money

by Brandon Wyson7 minutes / June 14, 2021

Staffing factoring is a subset of invoice factoring, a type of business financing commonly used by several industries to maximize cash flow and more effectively fund day-to-day operations by allowing businesses access to expedited cash without taking on debt. A company performing invoice factoring services – commonly known as a factor – purchases invoices at a discount from business-to-business (B2B) and business-to-government (B2G) companies. The factor pays out a portion of the receivable upfront. This means that the capital from an invoice that would usually payout in 30, 60 or 90 days is immediately usable. Factors will take anywhere from 1% to 3% of an invoice as a fee and pay out the remaining amount of the invoice to the company when the invoice is actually paid. Staffing factoring, which is also sometimes referred to as payroll factoring, specifically applies to staffing companies which organize and assign temporary employees. Staffing agencies regularly partner with factors because invoices from temporary workers traditionally take several weeks to pay out.

How Staffing Factoring Works

Similar to traditional invoice factoring, staffing factoring offers cash for unpaid invoices. Because the factor is purchasing your invoices, you won’t be making monthly payments like in the case of a business loan. Instead, the factor pays you a percentage of the invoice upfront, then once the invoice has been paid by your client, the factor will pay you the rest of the invoice amount minus fees.

Because invoice factoring involves three parties – a staffing agency, a staffing agency’s customer, and a factor company – there are more steps to the process than you would find with more traditional forms of financing. Here’s how staffing factoring works, step by step:

You invoice your customer.
You sell the invoice to the factor.
The factor pays you an advance on the invoice
Your customer makes payment on the invoice to the factor
The factor forwards you the remaining amount, minus any fees

Recourse or Non-Recourse?

Companies may have to decide whether to use non-recourse loans or recourse factoring when partnering with a factor. Recourse factoring means that in the unlikely event an invoice is not paid, you – the staffing agency – are essentially responsible. Non-recourse factoring, however, means that the factor will take the bulk of the risk in the event of an unpaid invoice. Many factors offer non-recourse agreements that apply only when an invoice is unpaid because an agency’s customer company is declaring bankruptcy.

Depending on a staffing agency’s size and cash flow, either recourse or non-recourse factoring may be a viable choice. A factoring company may offer better terms to a staffing company if they allow for recourse factoring. If a staffing agency and their customers have exceedingly good credit, a factoring company may pursue non-recourse. Every agency’s situation is unique, so consult relevant parties before deciding whether to pursue recourse or non-recourse factoring.

Is Staffing Factoring Right for Your Business

Staffing agencies frequently turn to invoice factoring to improve cash flow. Staffing companies are especially vulnerable to gaps in capital since agencies are typically paid anywhere from two weeks to up to three months after staff are assigned in either permanent or temporary staffing roles. Staffing factoring most directly benefits companies that have a consistent flow of invoices or a large staff of temporary employees. Staffing agencies looking to increase their number of temporary employees, then, could greatly benefit from working together with a factor. Instead of paying temporary employees with the previous week’s paid-out invoices, a staffing factoring company allows an agency to pay their temporary employees more directly and efficiently.

Qualifying for Staffing Factoring

While staffing factoring is not a loan, agencies may need to consider certain qualifications to partner with a staffing factoring or payroll funding company. Like any other financing company, staffing factoring companies may want to see that an agency’s invoices are consistent and meet the minimum threshold for invoice factoring. When seeking staffing factoring, an agency’s own credit is considerably less important than the credit of the agency’s customers. Staffing agencies with less than perfect credit are still very likely able to qualify for invoice factoring if the credit of their invoiced customer is strong. Factoring companies may also prefer agencies that have been in business for more than two years. Staffing agency invoices from temporary employees are especially attractive to factoring companies because the outstanding invoices will almost certainly be paid since the temporary employee already completed their hours. Staffing invoices are traditionally submitted with timecards as well which act as a secondary guarantee that services were rendered.

Benefits of Staffing Factoring

Cash flow: The most direct benefit to staffing factoring is a quick increase in cash flow. This quick increase in on-hand capital can alleviate cash gaps that could impact day-to-day operations.

No Associated Debt: Rather than taking out a loan, staffing factoring lets a staffing agency hold more capital without the traditional expectation of repayment. Once a factor purchases a staffing agency’s invoices, the factor will take on the collection of the invoice. Both loans and factoring are strategies to expand an agency’s amount of liquid capital. While a loan offers capital in exchange for the guarantee it will be repaid, factoring simply expedites money already guaranteed to an agency from their own invoices.

Better Customer & Employee Experiences: Companies offering invoice factoring services are not borrowers. Working with a factor is a partnership. Factors are financial companies and will often be more than happy to meet and consult with an agency to determine the best financial moves for their unique business. Factors may also be able to help agencies make better informed choices about which customer companies to partner with in the future.

Cons and Potential Problems with Staffing Factoring

Staffing factoring has one key downside that may turn away staffing agencies. Transactions with staffing factoring companies typically charge a 1% to 4% fee. Depending on the cash value of an invoice, agencies may decide that the fee paid to the invoice factoring company may not be worth the cost. Larger staffing agencies may then forgo staffing factoring in exchange for other kinds of capital guarantees.

Recourse factoring may also push some businesses away from staffing factoring. In the case of a recourse factoring agreement, if a customer merchant cannot pay an invoice, the staffing agency is fully responsible for the amount drawn. An agency, then, may consider the factoring agreement superfluous since they are still accountable for the bad invoice. When partnering with a staffing factoring company, agencies should weigh whether to pursue non-recourse or recourse factoring based on the credit and trustworthiness of their own customers.

Bottomline on Staffing Factoring

Cash flow is king in the staffing industry. If an agency has more capital on hand it can maintain higher liquidity after payroll, and widen its prospects. Depending on the size of a staffing agency, invoice factoring can expedite growth as efficiently as a loan, but without the worry of taking on debt.

Invoice factoring agencies are an invaluable partner to staffing agencies. Working together with a factor allows an agency to take better-calculated risks when partnering with new clients and can benefit an agency’s credit. As an agency expands and builds a relationship with its factor, an invoice factoring company can quickly become a resource for making more informed business decisions.

When deciding to partner with a factor, staffing agencies must consider how valuable on-hand capital is at their current capacity. For example: if an agency can use expedited capital to keep its business sustainable, staffing factoring can be a great resource. If a company has a density of unpaid invoices that leaves most of their capital on a weeks-long countdown, staffing factoring can speed up opportunities for growth that would regularly take much longer.

Invoice factoring offers agencies the financial flexibility to potentially take on larger accounts and expedite their own growth. Especially in the staffing industry, having more on-hand capital makes your agency more competitive, well-positioned and poised to grow.

If your agency is interested in learning more about invoice factoring and staffing factoring, get in touch with a Kapitus financing specialist who can walk you through the options available to you based on your unique situation.

Brandon Wyson

Content Writer

Brandon Wyson is a professional writer, editor, and translator with more than eight years of experience across three continents. He became a full-time writer with Kapitus in 2021 after working as a local journalist for multiple publications in New York City and Boston. Before this, he worked as a translator for the Japanese entertainment industry. Today Brandon writes educational articles about small business interests.

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6 Business Alternatives for Bank Loans and When They Make Sense

Manage Your Money

by Wil Rivera6 minutes / July 22, 2019

Need financing for your business but can’t qualify at a bank? There are various financing alternatives to keep your operations running.

Borrowing money is an essential part of building a small business. But when you need a loan, traditional lenders like the bank might not be an option. They tend to have strict small business lending standards. For example, you need established business credit, collateral and detailed financial statements for bank loan approval. This is a difficult hurdle for companies that have only been around for a couple years. Fortunately, as a business owner, you have other options, with a number of business alternatives for bank loans on the market today.

These alternative options can be your financing lifeline until you build enough of a financial track record to qualify for more traditional financial products.

LET’S TAKE A LOOK AT THESE BUSINESS ALTERNATIVES FOR BANK LOANS AND WHEN THEY MAKE THE MOST SENSE.

1 – Online Loans

Banks aren’t the only ones lending money. Alternative and online lenders are also a quality source of small business financing. They offer stand-alone cash flow loans that you can invest into your business and spend however you choose. If you want more flexibility, you could also open a line of credit. A line of credit lets you borrow, pay the money back and re-borrow again as many times as you want.

It’s easier to qualify for loans from alternative lenders because their requirements are not as strict as with banks. Another advantage is you often don’t have to secure the loan with your future business revenue or other collateral. However, your business will need to meet some standards like stable revenue and a good business plan for how you will use the loan proceeds.

Best fit for: A business with stable revenue looking to borrow cash quickly, without putting up collateral.

2 – SBA Loans

Another way to borrow is through the Small Business Association. This government organization assists small business owners and one of their services is to help them qualify for loans. The SBA doesn’t actually lend money. Instead they agree to back a certain percentage of the loan, guaranteeing repayment to the lender. This makes the lenders more likely to accept your application.

SBA loans can be a great tool provided you can qualify. The process does take time and you’ll need to submit, at minimum, similar documents that you would include as part of a bank loan application – such as a business plan, bank statements and your credit report.

Understanding the SBA system can improve your chances of qualifying so be sure to work with a lender that regularly works with these types of loans.

Best fit for: A business that can meet the SBA standards for a loan and also knows a lender that understands the application process.

3 – Equipment Financing

If your small business needs money specifically to buy a new piece of equipment or machinery, then equipment financing could be the answer. These small business loans can only be used to buy an asset, which also counts as the loan’s collateral. This makes it easier to qualify because if you end up not paying off the debt, the lender can take back the equipment as repayment.

With this type of financing, you can often buy new equipment with no money down but you’ll still receive the full tax break for the business investment, as if you bought the equipment with cash. You can also set up the financing as a lease which would let you replace the equipment earlier with new versions as they come out.

Best fit for: Buying or leasing new equipment for your business.

4 – Purchase Order Financing

A lack of cash can put even thriving businesses in trouble. 52% of small business owners had to forgo a project or sales worth $10,000 because of insufficient cash, according to an Intuit Quickbooks survey (slide 2). If you’ve got a project lined up but need some extra money to make it happen, purchase order financing could be the answer.

These short-term loans cover up to 100% of your supplier costs if you can show that you’ve got an order that will turn things around. Once you make the sale, the lender will deduct their fees from the proceeds. That way you still fulfill your order without taking on any extra debt. And since you can prove that you’ll be able to pay the money back quickly this financing is easier to qualify for. You just need to prove the upcoming purchase order.

Best fit for: When you’ve almost completed a sale and need a quick cash infusion to reach the finish line.

5 – Invoice Factoring

After you make a sale, your job still isn’t done because you you’ll need to collect payment. This can take between 30 to 90 days, depending on your payment terms. And, as many know, it could take even longer when customers miss payment deadlines. Not to mention there’s always the risk they don’t pay.

If your invoices are piling up and you need cash, invoice factoring could be the solution. You transfer over an unpaid invoice to a financing company, called the factor, and they’ll give you an advance on the payment.

From there, the factor takes over collecting from your clients. Once they get paid, they’ll give you the rest of the invoice amount minus their fee, which could be as little as 1.5% of the invoice amount.

Best fit for: A business with unpaid client invoices that wants to improve cash flow.

6 – Revenue Based Financing

Revenue based financing is the last of our business alternatives for bank loans. These loans have a simplified and fast application process, a great solution if your business needs money now. Lenders can approve this financing quickly because they just look at your historic revenue and how long you’ve been in business. They use this to forecast your future cash flow.

Based on that, they’ll give you a lump sum of cash. The lender will then collect a set percentage of your future sales on a daily or weekly basis.

Best fit for: A business with a proven history of revenue that needs money but does not want to go through a lengthy loan application process.

Don’t let a bank loan rejection discourage you from raising the money your business needs. As you can see, there are plenty of alternatives. If you have any questions to figure out which of these solutions is the right fit, reach out to a loan specialist today.

Wil Rivera

WD

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Tag Archive for: invoice factoring

Types of Financing

SBA 7(a) loans

Traditional loans

Business line of credit

Short-term Loans

Define Your Needs Beforehand!

Vince Calio

Content Writer

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Brandon Wyson

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Should I Get a Business Loan or Line of Credit?

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How Staffing Factoring Works

Recourse or Non-Recourse?

Is Staffing Factoring Right for Your Business

Qualifying for Staffing Factoring

Benefits of Staffing Factoring

Cons and Potential Problems with Staffing Factoring

Bottomline on Staffing Factoring

Brandon Wyson

Content Writer

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Should I Get a Business Loan or Line of Credit?

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LET’S TAKE A LOOK AT THESE BUSINESS ALTERNATIVES FOR BANK LOANS AND WHEN THEY MAKE THE MOST SENSE.

1 – Online Loans

2 – SBA Loans

3 – Equipment Financing

4 – Purchase Order Financing

5 – Invoice Factoring

6 – Revenue Based Financing

Wil Rivera

WD

Related Posts

Should I Get a Business Loan or Line of Credit?

2024 Small Business Grants, The Ultimate List

What is a Business Line of Credit?