For the longest time, loans have been a necessary evil in order for businesses to maintain and grow their operations. In fact, loans have become the default, all-purpose solutions for everything a business needs, whether it’s using short-term loans to smooth over revenue cycles, extra capital to purchasing assets, or as a means to supplement capital reserves to roll out plans for growth.
But are debt-based loans really necessary?
The Drawbacks of Using Debt-based Loans
Regardless of how loans can help in the short-term, there is no way to avoid the negative impacts they have on businesses. Debt-based loans require collateral and lower credit ratings, making it more difficult for businesses to secure financing in the future. And of course, loans place debt on the books. This means that businesses using short-term loans to overcome cash flow challenges might be setting themselves up for a worse financial situation down the line. Cash flow issues are usually recurring, and taking out a loan places debt on the balance sheet that must be repaid through monthly installments. The net result is that revenue is being used to make payroll and cover regular overhead expenses, plus the amount needed to repay the loan. When cash flow problems occur in the future, they could potentially be dire because the debt from the loan makes the total expenses higher than before.
There is a Solution
Fortunately, there is a way to solve cash flow and working capital issues without relying on debt-based loans. When businesses want to pivot away from loans, they use invoice factoring. Invoice factoring is nothing new in the world of business. In fact, there are records of factoring going back to the ancient world in Mesopotamia. The concept is the same now as it was then – a business uses factoring to turn unpaid customer invoices into immediate cash to get fast access to funds and boost cash flow. In turn, the accelerated cash flow allows businesses to build up working capital, reducing and eliminating the need for debt-based loans. Businesses that use invoice factoring do not need to take on unnecessary debt, and they preserve their credit ratings in the process.
At New Century Financial, we offer comprehensive factoring services and convert invoices to cash so you can access funds within 24 hours. Contact our offices today to learn more.