Obtaining Traditional Bank Financing

bank financing

Business financing is a must if you want to be successful. Financing always you to keep your cash flow properly in train, creating liquidity that you can draw. Financing provides the bridge over the gap that occurs between the invoices your customers are paying on and the working capital you need to pay operating expenses. Any business needs financing, but it can be very difficult to come by in many circumstances. Traditional business loans come with a number of difficulties. While traditional bank financing has its advantages when you need a large amount of money, it can be difficult to get what you need for more mundane expenses.

Requirements for loans through traditional bank financing

One of the biggest issues that people often run into with business loans is the requirements for receiving approval. Some of the materials you might be required to produce as part of the application process include:

  • Business profile describing the type of business you have, as well as how many employees you have, your annual sales, and how long you have had the business.
  • Collateral offered as security for the loan. This includes available cash and equity in the business.
  • Loan request detailing how you plan to the funds you receive, and the types of business financing you are looking for.
  • Business financial statements, including income statements, balance sheets and accounts receivable.
  • Personal financial statements showing your assets, tax returns and liabilities.

That is a lot of information. For start-ups, it is often necessary to include a business plan presenting your ideas of how you will turn a profit. This plan should also include information about the expected demand for your product or service, and research backing up your assertions.

The main advantage of going through this process is that you are more likely to get a large amount of money up front – if you clear all the hurdles. Additionally, you are backed by a traditional bank and incur some protection. However, if you are concerned about being able to get the loan in time for rapid growth, going through this lengthy process can deprive you of what you need to get the working capital you require right now.

Alternative to traditional bank financing

What many people don’t realize is that there are viable alternatives to business financing through a bank. Invoice factoring is a method of obtaining business loans that can provide you with faster cash. Instead of waiting to go through the approval process (which can be tedious) for each loan you apply for, you can set up a factoring arrangement that carries through. This is especially helpful in situations where you would like working capital quickly to fund expansion or for some other reason.

Here is how invoice factoring works:

You take your invoices to a factoring company (sometimes called a factor). The factor gives you between 50% and 90% of the face value of the invoice up front. You use the money for whatever business needs you have. The factor collects on the invoice. After the factor receives payment on the invoice, he or she takes a portion of the money as a fee, and the gives you the balance.

It is important to note that, rather than looking very closely at your business credit – as is done with traditional business loans – a factor looks more at the reputation of your customers. So, if you selling to a reliable company that is likely to pay the invoice, then your business financing is approved, even if your company is too new to have established the kind of credit usually needed for bank financing.  And, once your customers have been approved for factoring, you can bring in the invoices regularly. This allows you to get some of the cash up front, rather than waiting between 30 and 90 days for the invoice to be paid.

It is true that bank financing can be an important part of you business plan. However, if you need working capital more quickly, and if you are looking for an arrangement that helps you cash flow on a monthly basis, invoice factoring might be a better choice in terms of getting the loans you need to properly run your business.