When you run your own business, it’s crucial to keep the future in mind. You will need tools like cash flow forecasts and financial statements in order to monitor the financial health of your business. There are third party services you can use like an accounting software or a company that provides reports and forecasts for you. Or you can simply create your own 90 day cash flow forecast. Regardless of which method you use, you will need to create a long-term small business financing strategy, and invoice factoring is a funding method that can help businesses qualify for more traditional financing, like a bank loan.
Where to start planning a long-term financing strategy:
The first step you should take in creating your strategy is figuring out your current financial health. Create a 90 day cash flow forecast by yourself or through the help of another service to see how much cash on hand you have and will have for the next few months. After doing that, consider the seasonality in your business. Is this forecast going to be relatively accurate beyond these 90 days? Will you have a dip in business due to an ongoing pandemic and hurting economy? Once you know what you have, you will have a better idea of what you need. You can start considering whether your business will grow or shrink, and you can have the money to support either option.
What are the options for long-term financing?
The most obvious option for long-term business financing is a bank loan. The unfortunate reality of bank loans is that they can be difficult to secure for small business owners. Small business ownership is risky. 50% of small businesses fail after 5 years. This makes banks less likely to lend money due to the risk of failure. In addition to the higher risk, it can be hard for a small business owner to provide the necessary paperwork that banks require for underwriting unless they use a CPA or have the time to create the paperwork themselves. Time becomes another issue. Most small businesses have 28 days or less of cash reserve. This means that waiting for bank underwriting and approval is a luxury they cannot afford. Lastly, time in business or a business credit score may place bank loans out of reach for entrepreneurs. Even if a loan is offered, the repayment terms may be too harsh to meet.
How can small businesses qualify for long-term bank loan financing?
Invoice factoring services are cash flow solutions that work to build business credit while simultaneously providing business funding. Many small businesses that choose invoice factoring as a method of business finance are able to qualify for a bank loan in the future. Factoring services prepare a business for a bank loan by providing crucial business funding while the business works to improve its business credit or simply accumulate a longer time in business. Bank loan approval requirements can be high for new or small business owners which is why factoring is so popular with new and small businesses.
How is invoice factoring different from a bank loan?
Invoice factoring smooths and improves cash flow for businesses. Factoring is a financing solution for short or long-term growth, depending on the needs of the business. Not only does accounts receivable funding or factoring services provide cash on hand for businesses, but it also serves as a tool to monitor financial health for business owners. With aging reports and a simple dashboard for business owners to monitor their receivables, creating and submitting paperwork for a bank loan is easier than ever.
What happens if you want to factor my invoices until you qualify for a bank loan?
If your plan is to use factoring services until you can qualify for a bank loan, then do it! That sounds like a financial strategy that accounts for flexibility, speed, and length of funding. Invoice factoring services can be used as a bridge to more traditional financing options, like that bank loan. Other benefits of factoring include flexibility with monthly or no contracts, debt-free funding with no repayments to make, and strong cash flow to support your business growth. In fact, factoring your invoices means that you will have cash in hand the same day you deliver the goods or services to your client. This means you can build your credit score by having the cash to pay your suppliers on time or even early. A/R Financing allows small business owners to shape their business in order to qualify for bank loans.
Business Financing as a Bridge to a Bank Loan
Do you want a bank loan but need more time in business or a higher credit score to qualify? Consider factoring your invoices in order to meet those requirements in the future.