The COVID-19 pandemic has affected businesses greatly and experts say that it will continue to bring down the GDP. Therefore, a global economic crisis will persist for some time. The loss of income in almost every industry was tremendous. Of course, many entrepreneurs immediately started to look for ways to cut their expenses. However, this isn’t enough for the majority of businesses, regardless of how small they are. Therefore, financing is a necessity. But because of the increased risks to lenders, the global financing industry has ground to a halt. There are very few loan options available to businesses now. The only truly viable solution seems to be invoice financing.
COVID-19 Pandemic Impact on Financing Globally
The coronavirus pandemic had a huge impact on the global economy and every individual and business on the planet. Most of it wasn’t good because businesses had no choice but to stop functioning altogether. Some managed to switch to remote work. However, the majority of companies were only able to salvage a small fraction of their income, if any.
Unfortunately, the reduction in income doesn’t mean that business expenses were reduced as well. Even if it’s true for some types of expenses, the biggest of them (rent, utilities, paychecks, etc.) are still there. In this situation, applying for a loan became the only solution that businesses had to survive at all.
However, doing this became impossible fast because the majority of lenders have shut down. It’s true that the demand for financing has increased. But at the same time, the risks of it have also grown exponentially. And while big banks with their reserves and lenders with government backing are still able to offer some loans. The majority of other financing providers have shut down completely. Even credit card financing is almost impossible to come by these days.
The situation is extremely complicated for lenders now. They always take some risk, especially with the gig economy startups. But in the times of the global economic recession, the chances of such businesses succeeding and even surviving are low. Therefore, lenders choose not to take the risk of offering loans to enterprises that are seemingly doomed to failure.
The only loans available now are the ones backed by the governments, like the PPP program in the US. But there are still some financing providers willing to offer loans that have some valid security.
What Financing Options Are Still Available?
If your business is getting back on track after the COVID-19 crisis and needs money fast, now is the time to look up a detailed invoice financing guide. This is one type of financing that’s still available for every business that meets the requirements. Those requirements boil down to having the security of due invoices.
Usually, invoice financing is used as a short-term option for solving cash flow issues. It’s often used by B2B companies that have flexible payment terms. Retailers usually do not use invoices that are due within 30, 60, or 90 days. Therefore, this financing option is not applicable to them.
Invoice financing is still active now because invoices yet unpaid are solid security that lenders can rely on. Note that invoice financing is different from invoice factoring. In the case of factoring, the business actually sells the accounts to the lender and it’s the lending company that further chases payments from the customer.
With this type of financing, the business usually gets about 80-90% of the invoice upfront. The rest is returned only when the invoice is paid in full. The rate for it varies, but the average is 2% for the first 30 days and about 0.5% added for every 10 days that the invoice goes unpaid after that.
In the case of invoice discounting, the customer won’t be made aware that the borrower used unpaid invoices for financing. This is a better option for those businesses that need to keep such things discrete.
Invoice Financing: Pros and Cons
Invoice financing can be extremely useful, especially now when corporate financing options are so limited. However, you need to understand that this type of financing is not a miracle solution for all your problems. No loan ever is.
Understanding both the pros and cons of invoice financing is essential to use it wisely.
- You get cash quickly.
- You don’t need any other security but unpaid invoices.
- You get a higher chance of approval regardless of your credit rating.
- You can make it confidential (invoice discounting).
- You only pay interest on the borrowed amount.
- Only those with unpaid invoices can use this type of financing.
- You won’t be able to use your invoice ledger in order to get some other type of loan.
- You are only limited to the amount due to your invoices (and you won’t get 100% of it at all).
The biggest issue with invoice financing is that it severely limits the amount you can borrow. It also affects your budget plans because you won’t get full payments from those invoices. Due to the limitations of the financing method, some businesses cannot use it at all.
However, if you do meet the requirements, this kind of loan is a great option for these uncertain times. It will provide you with cash for your needs immediately so your business can get back on its feet.
But remember to use this money wisely as there might not be another opportunity to borrow for a while.
In Conclusion: How to Get Your Business Back on Track
When starting your business, you can find a lot of helpful tips for making it a success. However, no one really ever plans for a disaster like a global pandemic. In these circumstances, you have to use every available financing option to stay afloat. Sadly, there aren’t many of those available because lenders also face huge risks in an uncertain economy. Using invoice financing can be a lifesaver for a business. However, when you do this, remember to plan in a way that will allow you to actually move forward. Remember that you won’t be able to use the invoice receivable ledger as collateral for other types of financing. And there will still be interest left to pay.