One of the most important things to remember about business financing is that you have many different options available. You’re never limited to one type of funding, such as conventional loans or lines of credit. That variety is a beautiful thing because it makes it easier to choose terms that are comfortable for your current business situation and goals. Are alternative financing options, such as factoring, a good choice for your business? The answer depends on your needs.
Do You Have Enough Invoices?
The first things necessary to successfully use factoring are invoices. If you own a retail store where customers are expected to pay for purchases immediately, you won’t be able to take advantage of the factoring process. Generally, this type of funding is used by manufacturers, healthcare providers, suppliers, distributors, and B2B companies.
Do You Need Working Capital?
Next, focus on your goals. That can help you decide the best funding for your finances. Factoring helps obtain working capital. It can fund a lot or a little, but only for a short time. It’s not for large-scale purchases such as equipment or real estate purchases.
Do You Have Consistent Revenue?
Another important consideration for factoring is the type of cash flow you have. This type of alternative financing can help smooth out cash flow by shifting your available capital during the month. You can get funds when you need them rather than waiting for clients to pay invoices. This helps cover payroll, inventory, and similar needs, in addition to unexpected emergencies such as equipment breakdowns.
To make this work, though, you have to have sufficient revenue coming in so you can balance things out. Factoring is only designed as an advance, not a band-aid for major income problems.
Do You Have Specific Goals?
Factoring doesn’t have interest rates per se, but there is a cost associated with using the invoices to fund an advance. The details depend on the financing partner you choose, but these can be one-time fees or monthly percentages charged until your clients pay the invoice. At any rate, it’s not a good idea to use this method for long-term funding.
Put simply, you want to get your money, use it to boost your revenue growth, and choose the invoices you use wisely. That means prioritizing needs that deliver benefits for your profitability. Inventory, technology, and expansion plans can be great because they increase the amount of money you’re making.
Contact BMF Advisors today to learn about our factoring program and how it can benefit your business.
