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Invoice Finance vs. Traditional Finance for Growing Businesses

Businesses have access to many forms of financing. Crowdz’s solution is superior for growing businesses for several reasons.


Introducing Crowdz Conversations, a video series centered around helping growing businesses make smarter cash flow decisions.

In our first episode, we have James Kouzinas, our Director of Business Development and Sales, sitting down with Nate Hartley, our Chief Financial Officer, to discuss the many different forms of financing that small- to medium-sized businesses have access to, and why our solution is superior for growing businesses.


What Should a Company Consider When Seeking Financing?

When companies are working to determine the best type of financing for their business, one of the biggest factors is the cost of obtaining funds. Credit cards can be quite expensive, and may not be the best choice for consistent use. Similarly, overdrafts from your bank may be an option, but tend to be of modest size, with rates on an annualized basis between 30%-50%, which is substantially higher than invoice finance. 

Loans can also be a great option for businesses, but you must consider your capacity to use the proceeds of the loan effectively. Otherwise, you will be paying interest without earning any growth from the capital. 

Invoice finance, on the other hand, can offer competitive and even friendly rates and can be accessed prudently when needed, unlike a loan which must be repaid regardless whether the business is using the funds. When you don’t need it, you don’t have to use it. In addition, loans typically require some sort of collateral, which some small businesses may not own. Invoice finance, however, is an opportunity to liquidate or leverage an otherwise unutilized asset on your balance sheet to obtain financing for your business. 


Why It Matters that No Security is Required

One advantage of invoice financing is access to cash without collateral. Peeling the onion reveals cultural reasons why a lower collateral burden makes invoice finance the most reasonable option. For women and minorities, accessing capital, just to purchase assets that could be used as collateral for greater capital, can be a significant challenge. This is where invoice financing is a good option. Unlike traditional bank loans, invoice finance need not require collateral, making it an accessible option for individuals and businesses that may not have a family history of building up that capital. 

In addition, traditional banks often require a good track record of using credit. However, for many women and minorities, the lack of access to capital makes it difficult to establish that track record. This creates a catch-22 situation where individuals are unable to access the financing they need to grow their business, and are instead forced to rely on expensive credit cards or overdrafts.


Different Markets Do Different Things: Women-Led Companies

In many economies, small and medium-sized enterprises (SMEs) are the driving force behind job creation, and these businesses are often owned by women. However, in certain regions of the world, reliable title registries for assets like land are not always available. Even in countries where registries do not exist, assets are more than likely to be in the name of a man rather than a woman. 


Why is it More Difficult to Work with a Traditional Factoring Company?

Traditional factoring companies can be difficult to work with due to cumbersome onboarding processes. The process can be time-consuming, taking anywhere from two weeks to two months to approve funds. They may also require extensive documentation, making this, overall, less efficient than an automated process. Additionally, they often require personal guarantees, which can be a barrier for some businesses. 

Here at Crowdz, our onboarding is quick and efficient. We have streamlined these steps to create a seamless onboarding process that can be completed within 24 to 48 hours. We also strive to make the process as easy as possible for our customers, eliminating unnecessarily burdensome requirements, like the amount of documentation required in order to expedite the approval process.


What Type of Businesses Are Most Likely to Benefit from Invoice Finance?

Invoice finance is often best for growth-oriented businesses that are capital constrained. This does not mean that they have no capital, but that the capital that they do have may be better utilized for new equipment, rather than financing payroll. Invoice finance allows small businesses to maintain their existing capital and use it for more productive purposes. In the alternative, should they decide to not sell their invoices, those invoices will just be assets that sit on their balance sheet, symbolic of value, waiting to be paid, but not put to work. Selling unpaid invoices gives SMEs the opportunity to utilize already-earned cash and get ahead of constraints that may be out of their control.


Is Invoice Finance Suitable for Businesses of All Size?

While large multinational banks often focus on providing financing to large vendors, invoice finance is particularly used for small businesses. For example, Citigroup may be working with Boeing, and will provide financing facilities to Boeing’s top 20 vendors, but the reality is that Boeing more than likely has tens of thousands of vendors, a vast majority of which are small and stand to benefit proportionately more greatly from finance. If it is uncommon for this type of scenario to offer finance to the smaller vendors, it is not because it is useless. Invoice finance serves a useful purpose for small businesses, more useful for small businesses than large ones. Large vendors may be able to obtain a line of credit from a bank, but small businesses may not have the same track record or liquidity. Invoice factoring—in which finance is not borrowed, but earned by selling invoices as assets—is an attainable solution for small businesses.


How Does the Crowdz Finance Rate Determination Method Differ From Traditional Factoring?

When it comes to determining the finance rate for a business, traditional factoring companies often take a similar approach to banks. However, at Crowdz, we take a different approach that prioritizes speed and real-time data, not accessible to traditional factoring companies at the time of underwriting. The more information we have about a business, the greater the likelihood of their approval and a favorable rate. As the relationship between the company and Crowdz grows, the company’s score may go up due to our understanding of the company’s idiosyncrasies, customers, and payment performance.

Typically, banks onboard customers and perform a credit assessment at the time of onboarding, and then they would do another assessment when they review the accounts. They do not usually leverage live data. With Crowdz, since we are connected to the accounting software and receive credit information in real time, customers have a real opportunity to improve their score if they have good behavior. 

In addition to the laborious credit assessment process during onboarding, traditional lending companies or banks typically require periodic reassessments of their customers, which they would have to require their customers submit to an arduous reevaluation of that relationship. This process can be time-consuming and resource-intensive. However, at Crowdz, our data-driven approach allows us to get a more accurate, real-time understanding of a business’s financial health, eliminating the need for frequent credit evaluations. To our knowledge, no other factoring companies currently use real-time data in this way.


Interested in booking a demo with one of our team members? Click here to start the conversation.

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