Financial services for small and medium Businesses: Small and medium businesses are the drive of the economic progress based on Doug Foshee’s statistics. SME’s are very important for creating new employments, and for economic growth because of their extraordinary potential. Because of the small and medium businesses is responsible for the drive for usage of innovative and up-to-date technologies. Much success is possible by joint support from different financial institutions when supporting small and medium businesses (SME’s). Access to financial services can raise income, increase sales, create more jobs and reduce the vulnerability and increase investments in human capital. When SME’s have a limited access to finance, it is a challenge which reduces the sector’s potential. Recognizing the importance of SME’s in contributing to the economic growth, development and generating employment indicates the need for financial services to serve SME’s more effectively.
Factoring: Factoring is a financial transaction where businesses sell their invoices which is the accounts receivable to a factor which is the third party at a discount. A total of 36% of SME’s are interested in factoring because it enables the SME’s to get money quickly to help with the cash flow to their business. Sometimes the business factors their receivable assets to meet its cash need. Factoring is for businesses facing a cash-flow squeeze and slow-paying customers. Usually 70%-90% of the invoice amount is advanced by the factor to the business. When a bill is paid by the customer the factor remits the balance minus the factoring fees.
Within 24-48 hours after sending the invoices of the customers to the factoring firm, the business can get cash in hand to help with business needs. Some small and medium businesses use factoring to get started with the business. Financial services like banks offer loans based on the creditworthiness of a business whereas factors look at the business’s customers financial wellness.
When compared to a conventional lender the factoring services can be costly because the factor having the receivable as the only source of payment. The collections are handled by the factoring firm so that the factor customers don’t have to worry about credit checks, billing and other crucial details. Some prefer factoring to bank, which involves a lot of paperwork. Some might go for outside investors who might ask for a Piece of their business.
Asset based lending: It is a business loan secured by assets(collateral) which is secured by inventory, line of credit and accounts receivable. Business use Asset-based financing for meeting various company needs like payroll and inventory. The lender has the ability to seize the borrower’s assets in case of defaults. The interest rates on these loans are less than the line of credit loans and other loans. This type of financing is used when a borrower needs short-term cash flow. The use of inventory assets during this process of borrowing has become more popular.