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Running a business is tough, especially in today’s volatile economic world. As an intelligent business owner, you’ll closely follow financial news to track how your business is doing and where the market stands to ensure financial success.
When to Consider a Loan and When to Opt for Alternatives
However, even if you encounter tough financial times as a business owner, you don’t immediately have to throw in the towel. A slowdown in business or a stoppage of cash flow doesn’t mean your company is dead. You can turn to various sources for money to keep your business afloat while you get back on your feet, collect money owed, make some sales, and return to a thriving business once more.
If you’re a business owner, you’ve likely considered applying for a loan. Loans can be an excellent option for helping you stay in business while the economy is rocky. However, loans can also pose potential risks because they might leave you with high interests rate that is taxing and make the loan difficult to pay back. If a loan isn’t the right option for your business, consider an alternative, like invoice factoring, accounts receivable financing, and more.
Here are some strategies to keep your business afloat and get help from an invoice factoring company or another alternative to help your business keep functioning.
When to Consider a Loan Over an Invoice Factoring Company or Other Financing
There are times when you should consider a loan as the best means of helping your company stay in business. The following scenarios can be used when your company is in the proper position to receive a loan.
You Have the Documents for Approval
Banks or lenders only lend money to someone who is going to use that money in a way that will ensure that they will eventually get paid back. You’ll likely need to show some documentation for approval to obtain a business loan. This documentation may include tax returns, pay stubs, or a business plan. Consider applying for a loan only when you have that documentation ready.
You Have Collateral to Secure the Loan
When giving out a business loan, you need to have collateral that will make the loan secure. This may mean space, equipment, or product that you own. That way, if you don’t pay the loan back, the bank or lender can seize that collateral as payment for the loan. This makes lending much safer for whoever is loaning you the money.
You’re Not Worried About Your Credit Score
If you apply for a loan (business or personal), just applying and securing the loan can cause your credit score to be lower. If you pay back the loan on time, the score may go up. But if you default, it’ll hurt your credit. Only apply for the loan if your credit score can take it, and you won’t need a good credit score for anything else in your life if, for some reason, you get into trouble paying back your loan.
When to Opt for Alternatives to a Loan
If your business doesn’t mean the above factors, you may want to opt for an alternative to a loan. Invoice factoring is a popular loan alternative, while many other financing options can help keep your business running while your cash flow is suffering. Here are some reasons to opt for an alternative to a loan (like using a factoring company) and which options might suit your business.
You are a Riskier Borrower
If you appear to be a riskier borrower on paper, you may want to consider invoice factoring as a means of helping your business. With invoice factoring, you sell unpaid invoices to a factoring company upfront, and they pay you cash. Then they pursue your customers who have open invoices to make those payments. Invoice factoring companies are better for companies who have customers with better creditworthiness than your company. They are a good choice when your company likely won’t qualify for a small business loan.
You’re Not Sure How Much Money You’ll Need
If you don’t know how much money you’ll need, a line of credit may be a wiser option than a loan for your business. When you open a line of credit, this line of credit functions much like a credit card for a business, you can use small amounts of that credit line at a time, then pay them back. You may use the whole line of credit or just some of it. A line of credit is a good choice for a company that knows they might need financial help down the line, but they’re not sure how much or if they’ll need assistance repeatedly.
