When businesses need funding, the conventional solution is to take out loans for working capital. This sets the debt cycle into motion, and many businesses find themselves dependent on loans for the duration. However, the debt cycle can place a big strain on finances and limit business growth.
What Is the Debt Cycle
When a business takes out a loan, the capital is given in exchange for debt. The business then makes payments on the loan, plus interest, to pay off the debt. Loan debt takes a good chunk out of monthly revenue, and payments must be made regardless of how many or how few sales are made in that time. If cash flow is strained, businesses may take out additional short-term loans to smooth out revenue cycles at the risk of placing even more debt on the books, and juggling various loans at different interest rates can place a business in the fast-lane towards bankruptcy.
Business Growth and the Debt Cycle
When businesses try to position themselves for growth, they also take out loans to cover the cost of expansion and increased production. The debt that comes with loans for growth capital increases the risk for business owners and limits the potential for expansion. As a business expands, the revenue must exceed the new overhead costs as well as the debt from loans in order to be successful. To compromise, many businesses scale back on growth projects so debt and overhead costs are more manageable. Even still, increased sales do not guarantee faster revenue, especially if invoices are issued on staggered payment schedules of 30 days or longer.
Breaking Free of the Debt Cycle
To maintain a healthy cash flow, build up capital reserves, and reduce or eliminate the need for debt-based financing, businesses use accounts receivable factoring. Instead of waiting a month or longer to receive payments from clients, accounts receivable factoring immediately converts unpaid invoices to cash, which allow for rapid and successful growth without the limitations of debt-based loans. No debt, fast revenue, and minimized risk that gives businesses an advantage over the competition.