Banking Aspects of a Business
Bank factoring generally refers to the process in which a bank buys a business’s account receivables instead of lending against them. Most major banks and a growing number of smaller banks are involved in factoring. Traditionally, however, a separate agency usually provides factoring programs because of tight governmental restrictions on banks that curtail lending limits.
To be considered for bank factoring, a business owner must accept and process credit card payments from its customers. Once a bank buys the company’s accounts receivables, it calculates the amount of advanced funds to be provided to the owner, and then collects that amount from the customers. The bank earns a certain percentage off the accounts every month. Once the entire balance is paid off, the bank subtracts the original amount of funds advanced and pays it back to the business owner.
Banks may also require certain other criteria to be met before considering an individual for factoring. The most common criteria considered are a company’s sales volume, average invoice, gross profit, and credit terms available to customers. Because their main focus is on the financial stability of a business’s customers, banks usually do not take into account restricted working capital or prior losses determinants for approval of factoring.
Bank factoring offers many benefits to individuals in need of business capital: immediate deposit of funds, simplified billing processes, and prompt payment of invoices.
A bank loan is a specified amount of money lent to a client for at an interest rate. Terms of payment and interest rates vary greatly depending on which bank lends the money. Bank loans for consumers and bank loans for businesses have different approval requirements, and it is much harder to get a business loan from a bank.
The first things a bank looks for in determining whether to approve a loan are the character, promise, and credit of the individual applying for the loan. These three criteria tell the bank if there is any chance the individual will not pay back the loan, therefore putting the bank’s money at risk. If it does happen that the individual does not repay the loan, the bank wants sufficient collateral to be on hand to compensate for any unpaid funds. When considering a business owner for a loan, the bank also looks at the business’s profitability record, current assets, and the owner’s investment in the company. Typically, a bank loan to a small business requires the owner to personally guarantee the borrowed funds.
Another option for a business owner who is unable to secure a business bank loan is applying for a personal bank loan. These loans are much easier to obtain, and the funds can be directed towards the business. Banks feel safer about approving personal loans because statistically, a loan requiring personal collateral, such as a home, is more likely to be repaid than a loan for a business.