Financing Options for your Small Business

Seeking finance for your business can be pretty stressful, especially if your business is new, struggling and in need of money quickly. It’s even harder now with our country’s economy the way it is, making is harder for businesses to qualify for bank loans, line of credit, or equities to get approved. Even if the loans were approved, it takes too long to obtain. What are business owners to do when they need funds but cannot qualify for traditional financing options?

Factoring

You can use invoice factoring for your delivered goods or provide services and get billed later. Factoring has become increasingly popular among businesses that have a large amount of funds tied up in receivables.

In a factoring transaction, businesses assign an invoice, batches of invoices, or an entire customer account to a factoring service provider, who essentially buys the invoices from your business at a discounted price. For example, you may get $4,000 up front for a $5,000 invoice. When the factoring service collects payment from your customer, you’ll get the remainder, less factoring fees and charges.

Be very careful though when signing the contract, some factoring companies assess harsh penalties for late customer payments or defaults. Sometimes your business can be the one responsible for the amount, because factoring companies can craft different service agreements that specify the rates you will pay and the consequences if customers end up not paying. The more creditworthy and established your customers’ invoices are, the better rates and terms you are likely to get.

Also, since customers pay the factor directly, you should make sure that the factoring company provides reliable service to your customers as well. They’ll be interacting fairly often. To make sure the factor represents your business professionally, ask to listen in on a collection call or see a sample correspondence.

Merchant Cash Advance

Similar to factoring, a merchant cash advance sells the right to future revenues. You allow a provider to take a daily cut of your credit card receipts in exchange for upfront cash payment. Daily repayments are made automatically from your merchant account until the advance amount, plus the service fees, is paid back.

In order to qualify for a business cash advance, you will need to have credit card processing with a merchant account. Some of the most common requirements providers ask from their applicants are:

• To be in business for over a year

• Maintain a certain monthly credit card sales amount, anywhere from $3000 to $5000

Most applicants who applies for a merchant advance gets approved, even businesses in high-risk industries, for example online stores and adult businesses. The only difference will be that businesses in a risky industry will pay higher rates than businesses not considered a high-risk factor.

Alternative financing can be a safety net when you need it. Both factoring and cash advance service should be used strategically. Research and choose a provider that’s fair and honest. Make sure you use these options correctly though, and not as a routine source for financing. Make sure you evaluate the reasons why you need alternative financing because relying on these services can be costly and have an adverse impact on your business operations.