Using a credit card is one of the most common ways entrepreneurs finance a new business. In many cases, that’s how small businesses are launched.
Credit cards are convenient and easy to obtain and use. So it’s not surprising that small business owners rely on them for their day-to-day operations.
There are other traditional financing options, especially for more established small businesses, such as a term loan or a business line of credit.
But there’s another option, one based on a funding source most business owners don’t even consider: unpaid invoices.
Invoice factoring is also known as invoice financing or accounts receivable financing. It is not a widely known financing option, even though it’s been around for about 4,000 years. Invoice factoring allows you to access capital trapped in your accounts receivable. Instead of waiting 30, 60, or 90 days for a customer to pay their bill, you can cash in a portion of an invoice for a fee.
The rise of online invoice factoring
In its traditional form, factoring is known to be slow and, clunky, and involves a lot of paperwork.
The good news is some financing companies, such as Bluevine, now offer factoring as a 100% online solution. No more paperwork. And you also have more control over which invoices to submit for funding.
Compared to credit card fees, factoring costs are much lower. I’ve come across clients who said their vendors charge a fee when they pay their bills with a credit card. Factoring gives them an opportunity to free up invoices and pay their bills with cash.
There are other advantages in using factoring instead of a credit card. For one thing, with factoring, you’re essentially gaining access to funds you’ve already earned. You’re not incurring more debt.
Avoiding a huge debt burden
In fact, that’s one of the biggest hassles about using a credit card. If you’re not careful, your business might end up with a huge pile of debt.
I recently tried to help a business owner who was wrestling with enormous credit card debt. He was at 112% utilization of his personal credit cards which hurt his FICO score and severely limited his ability to take care of operating expenses.
Remember that personal credit is fragile. When you use all the credit you have available it can turn a great score into a poor one without even missing a payment!
Lenders are going to see full utilization as high risk. Even if you’ve never missed a payment they are going to be hesitant to offer you more credit.
We’ve run into business owners who tells us they’re tapped out on all their credit cards. No matter how much you plan, starting a business is a tough road with many unexpected costs.
And, of course, there are certain important business needs that you simply cannot cover with a credit card. One example is payroll. Invoice factoring offers a smarter and more convenient solution for your day-to-day business funding needs, big and small.
This article was first published on June 1, 2017. It was updated on September 4, 2018.