Summary: Many self-employed entrepreneurs will need financing at some point in their careers. Unfortunately, self-employed freelancers don’t have many financing options. Lenders often prefer working with larger companies because they have ample collateral and longer track records.
This article discusses two solutions: SBA Microloans and invoice factoring. Both can meet the needs of many freelancing professionals and have simpler qualification criteria than conventional products. We cover the following:
- What financial challenge are you facing?
- Problem: Improve cash flow
- Problem: Buy equipment
- Problem: Add inventory
- Solution: SBA microloans
- Solution: Invoice factoring
1. What financial challenge are you facing?
Few financing products are flexible enough to help a business overcome every type of financial challenge. Instead, each product is good at solving a specific financial challenge. Consequently, choosing the right type of financing for the problem you are trying to solve is essential. This is an important but often overlooked fact.
Choosing the wrong type of financing is a common mistake among self-employed business owners. This mistake often has long-lasting negative consequences. Analyze your situation to determine the root cause of your financial problem. Only then will you be able to determine which financial product is best for your situation.
In our experience, most self-employed business professionals are usually trying to solve one of three problems. They want to improve their cash flow, buy equipment, or add inventory. We examine these challenges in the next sections.
2. Problem: Improve cash flow
Many freelance professionals encounter cash flow problems as a result of working with commercial and government clients. These clients usually provide steady work but require you to offer net-30 payment terms. These payment terms give your customers 30 days to pay their invoices.
Offering payment terms to customers can create cash flow problems. Most self-employed professionals can’t wait 30 days for payment. At least, not initially. They need funds to pay suppliers, salaries, and other expenses.
This type of cash flow problem is usually best solved with a revolving facility, such as invoice factoring.
3. Problem: Buy equipment
Buying equipment can be challenging for small businesses. Most equipment purchases require a large cash outlay, which creates a financial burden.
There two ways to acquire equipment. You can either buy the equipment or lease it. The best option to buy equipment is a business loan. Use the loan proceeds for the purchase and then pay the loan back over time.
Alternatively, you can lease the equipment through a leasing company. The structure is simple. The leasing company provides you with the equipment for a monthly fee. Once the lease ends, you can return the equipment or buy it for a nominal cost.
Both financing options have advantages and disadvantages. Consult an accountant if you are unsure which option works best for you.
4. Problem: Add inventory
Getting financing to buy inventory is generally difficult. Inventory financing is typically available only to larger companies. Unfortunately, no specific solution solves this problem well for small companies.
Fortunately, one option works reasonably well. You can use an SBA-backed microloan to acquire inventory. This solution is not perfect, but may help you achieve your objectives.
Keep in mind that inventory is usually best financed with a revolving line rather than a loan. Consequently, you will need to manage your inventory and finances carefully.
5. Solution: SBA microloans
We consider Small Business Administration (SBA) backed microloans to be one of the best financing options for self-employed business owners. These loans are intended for small business owners and go up to $50,000 (varies).
SBA microloans have simple qualification requirements and are typically offered by providers whose mission is to help small companies. They often come bundled with mentoring services regarding how to operate a business. These services are an essential component of these loans.
These loans are flexible and can be used for different purposes, including:
- Improving cash flow
- Acquiring inventory
- Buying equipment
- Adding staff
- Handling new projects
Here is a list of microlenders.
6. Solution: Invoice factoring
Invoice factoring helps small businesses improve their cash flow by financing their accounts receivable. It provides funds to cover essential expenses and to make new investments.
Factoring is typically used by freelance professionals who must offer 30-day payment terms to their business clients. These plans work well for small companies because they have simple qualification requirements, are flexible, and can be deployed quickly.
Read “What is Factoring?” to learn more.
a) How does it work?
Most invoice factoring transactions finance your receivables in two installments. However, owner-operators in the trucking industry often qualify for single-installment transactions.
The first installment covers up to 85% of the invoice’s value. It is deposited into your account shortly after the factoring company processes your invoice.
The remaining 15%, less your factoring fee, is deposited into your account once your customer pays. This installment settles the transaction. However, most small companies use factoring regularly to improve their business.
b) Qualification criteria
One important advantage of invoice factoring is that it has simple qualification requirements. Furthermore, many factoring plans have no minimums, which makes factoring a great option for self-employed individuals. The qualification requirements include:
- Being an incorporated business (LLC, Inc., etc.)
- Having commercial clients
- Invoicing after work is completed
- Having no liens or serious tax issues
Get a factoring quote
We are a leading factoring company that finances self-employed professionals. For information, get an online factoring quote or call us toll-free at (877) 300 3258.