3 Reasons to use Invoice Factoring during COVID-19
COVID-19 has devastated the US economy. Over a million businesses have closed their doors, and the GDP declined by 32.9% in the second quarter. While the economy has improved within the past few months, the economic repercussions will continue to impact businesses.
With this harsh reality, it has never been more important for businesses to ensure that they have sufficient working capital. While PPP funding has been exceedingly helpful in bridging their funding gaps, businesses should look to a more permanent and reliable solution for their cash flow needs.
Invoice factoring is a solution for companies during this current economic downturn. Companies sell their unpaid invoices to a factoring company for immediate advance payment.
Here are 3 reasons companies should use invoice factoring during the COVID economy.
The Paycheck Protection Program (PPP) expired on August 8th and the Capitol Hill discussions on extending PPP have stalled. Given the concerns of the level of government spending during this pandemic, it is likely that the aid package Capitol Hill creates will not be as robust as the first offering. This could be catastrophic given that many businesses relied on PPP funds to compensate for lack of revenue.
With this uncertainty, invoice factoring becomes a very appealing financing option for companies looking to stabilize their cash flow.
New Source of Liquidity
Many companies have reacted to the COVID-19 crisis by building up their cash reserves through mass layoffs and service cuts. Companies are drawing down an entire year’s worth from a line of credit within the first five months.
According to the Federal Reserve of Economic Data, commercial and industrial loans across all U.S. commercial banks rose from $2.3 trillion to $3.03 trillion between February 2020 to May 2020. This increase can be accounted for by small and medium-sized businesses preparing for an extended period of losses during quarantine. The bottom line: businesses need to find new sources of liquidity and this is where invoice factoring comes into play.
More Restrictions in Bank Lending
Another reason why companies should consider invoice factoring is that banks have tightened the restrictions for their loans. According to the Fed’s latest Senior Loan Officer Opinion Survey on Bank Lending Practices, approximately 70% of lenders have increased their requirements for commercial and industrial loans. While banks exercising this caution is warranted, the harsher restrictions make it more difficult for companies to get the cash they need. In such a situation, invoice factoring can help companies meet their funding needs.
Accel Business Funding has helped many businesses through our invoice factoring financing services.