Mahi Sall, Advisor, Fintech-Bank Partnerships, Payments and Financial Inclusivity
January 25th, 2023
Mahi Sall is the CEO & Founder of FinXpair, a Berlin-based strategic advisory boutique firm focu[...]
Securing Invoice Factoring As A Small-Business Owner, Expectations vs Reality
Forbes | | Sep 10, 2021
Payson Johnston is the CEO and Co-Founder of invoice finance marketplace Crowdz, helping SMEs get paid faster and access working capital.
For most enterprising Americans, running a small business isn’t a walk in the park, especially during a pandemic. With the fundamentals of how we conduct business changing seemingly every week, hardworking SMEs have adapted with new strategies to stay afloat, from bodegas and family restaurants introducing online shopping to dance studios offering remote classes.
With banks tightening lending criteria and government stimulus incentives requiring mountains of paperwork, SME owners have looked to alternative financing methods to fuel their most critical growth cycles and reach new milestones, from expanding product lines to growing their team.
See: ASC and FCAA adopt new prospectus exemption to support small business capital raising
Alternative financing options like invoice finance (or receivables finance) have emerged as a boon throughout the pandemic, despite existing in various forms, similar to factoring, for decades. Lower barriers to entry and reduced overheads have led to the proliferation of easy-access options and platforms, meaning private funding for communities is increasing as more investors and organizations realize their bottom line can support communities and drive returns.
As a leader in this space, I’ve witnessed some common misconceptions, or expectations, that make it unclear how invoice financing offers an alternative option to secure financing. Invoice financing isn’t new, but it has become more popular, particularly during the pandemic, because this method generally allows businesses to exchange unpaid invoices for instant cash, which is then repaid when the original invoice is settled by the customer.
Expectation: I need a high credit score or an established business to access finance.
Reality: So what happens if your business is young, hasn’t previously needed credit, or is deemed “riskier” by discriminatory lenders? Though there are many plausible reasons a responsible business may have a credit score in its infancy, it automatically rules out their lending options, right?
Read: The Intersection of Small Business, Tech and Our Financial Ecosystem is More Important Than Ever
Not quite. Invoice financing fast-tracks money you’re already owed, so the risk factor is reduced for the funder and makes highly leveraged credit lines redundant.
Some providers are also developing new risk assessment models to improve equitable access to finance. Businesses with timely repayment habits or creating positive impacts in their communities are incentivized with better rates. Further, initiatives like the Facebook Invoice Fast Track program specifically focus on improving access to finance for diverse and minority-owned businesses with the commitment of buying $100 million in outstanding invoices.
Expectation: Invoice finance is the last resort for failing companies.
Reality: Alternative finance providers have historically been seen as the final hope for businesses with nowhere else to turn other than high-interest, non-bank providers to bail them out. But the tables have turned. With the proliferation of fintech disruptors and the contracting risk appetite of banks, alternative finance options have become a tool for companies who need access to instant and reliable sources of working capital.
Within five years, 45% of businesses shutter, and for startups, this rate is worse, with over 90 percent eventually biting the dust. A study from U.S. Bank revealed for 82%, the biggest reason for failure is cash flow mismanagement.
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