2 Ways to Finance Your Business
While you can do the basics of business planning without financing, at some point you need cash to grow your business. Whether it’s getting that first storefront, hiring help or buying equipment that will allow you to build inventory, cash on hand won’t always be enough. That’s when it’s time to look at business financing options. It used to be that the only options were a small business loan or investors who bought portions of your business. Now there are several options for generating cash flow without long-term loan repayments or giving up complete control of your business. Read on for two short-term options when you need cash now.
If you do business-to-business sales, you know that you sometimes have to offer terms that make cash flow difficult. If you’ve offered 60-day terms but need to get paid more quickly in order to continue your business, being busy can feel like the opposite of success. It’s almost like the higher your sales the deeper the financial hole you’re in. Turn that situation around with invoice factoring. This type of business financing allows you to sell your open invoices to a financing company for a fee. You’ll usually receive about 80% of the face value of your sales. The nice part here is there is no loan and nothing to repay. Remember to adjust your forecast though, because once you’re paid those accounts receivable are gone and the finance company will receive the payments for the invoices.
Don’t confuse invoice factoring and invoice financing. In the latter, you are actually taking out a loan that will require repayment. Here’s how it works. Like invoice factoring, this can be a good option for companies that need cash sooner than they will see it through invoicing and in both cases the odds of approval are based on your customers’ credit more than your own. A financing company will offer you a loan that is equal to your open invoices. The invoices stand as your collateral and you can never borrow more than you know you already have coming in. These short-term loans can provide peace of mind that you’ll be able to cover the loan, and unlike factoring, your customers will never know that you used this type of business financing.
Which type of financing works for your company depends on how you feel about losing your receivables versus having a loan that needs repayment. Talk to your finance company to discuss the fees and what option is best for you.