Financing Your Business Without Debt

Many business owners complain that access to business funding is the biggest limitation that they have to growing their businesses. It's a sign of our current economic times, but companies are turning business opportunities away because they do not have the financial resources to pursue them. Many believe that a business loan or line of credit would solve their problems. However, it's very difficult to obtain business financing in the current environment. Most institutions are reluctant to provide business loans to clients that cannot show substantial assets, sizeable collateral and strong financial statements. Few small companies can meet these criteria, so conventional debt financing in general is only available to companies that are in great financial health. There is an alternative though, one that lets you finance your company without using debt financing.

Having cash flow problems is one of the biggest reasons why many growing companies run into problems. For many, these problems start because they give their customer up to 60 days to pay their invoices. This common practice forces companies to use their own resources to cover expenses while waiting for customers to pay. This can lead to problems when the company runs low on cash or when customers start taking longer to pay. At the very least, it will prevent growth. At its worst and if not managed properly, it can put your company out of business. There are two ways to solve this problem without using a business loan. One way is to give your customers an incentive to pay quickly. A common practice is to offer then a 2% discount if they pay in 10 days. The problem with this strategy is that you are still ultimately at the mercy of your customers. The second alternative is to use an invoice factoring facility, a tool that allows you to obtain quick payments from your creditworthy customers.

Factoring accelerates your customer payments by using a financial intermediary, called a factoring company, that buys your invoices at a small discount and pays you upfront for them. This eliminates the problem of having to wait for customer payments and strengthens your cash flow. When managed properly, you can use factoring as a platform to grow your company without incurring in conventional debt. An important feature of factoring is that most transactions are structured as invoice purchases rather than as business loans.

The factoring company's fee, commonly referred to as a discount, varies and it's based on the size of your invoices, your sales volume and the credit quality of your invoices. As a matter of fact, the credit quality of your invoices is the most important criteria for qualification. This enables small companies, whose biggest asset is a list of strong clients, to use factoring to their advantage.