Businesses who are struggling to maintain a healthy cash flow in a time of crisis now have more options to turn to. Aside from conventional loans, businesses can also utilize short-term business loans and cash advances to stay operational and turn a profit.
While conventional loans charge you interest and offera longer repayment term, short-term business loans and cash advances usually use the simpler factor rate, which is basically a fixed multiplier against your loan principal amount. The factor rate, however, is determined by many things.
Your Personal and Business Credit History
Just because a short-term business loan doesn’t charge interest, it doesn’t mean you don’t have to worry about its cost. The factor rate of a business loan still determines how much you have to repay, so it is worth checking the actual cost of the loan before agreeing to take one out.
What is a Factor Rate? – Advance Point Capital has more detailed information, but the factor rate of your loan can be determined by both your personal credit history as the business owner and the credit history of the business itself. Similar to the way banks determine interest rates based on your credit score, short-term business loans use the same method to calculate the suitable factor rate based on your risk profile.
If you want to lower your factor rate, the two credit scores are the components you want to address first. Settle unpaid credit card bills, make sure you review your credit reports and eliminate inaccuracies, and stay on top of other business loans to get a lower factor rate.
The Industry You Are In
Lenders also review the state of the industry you are in to determine the base factor rate for your business loan. This particular factor has gotten more and more important, especially with the market littered with uncertainties.
There is nothing much you can do to influence the way lenders see your industry. However, you can demonstrate strong fundamentals and the ability to maintain a healthy cash flow to show that you are healthy as a business. This too will help lower your factor rate and make the short-term business loan more affordable.
That actually brings us to the next factor.
Cash Flow and Financial Statements
The best way to lower your factor rate, however, is – as mentioned earlier – by making sure that you are strong as a business. This means covering the basics and ensuring healthy fundamentals as the business operates on the market.
Cash flow health is the key component here. Yes, you need financing to pay for certain projects or to cover a spike in demand, but that doesn’t mean you have an unhealthy cash flow. Occasional financing needs are okay; constant need for financing is what you want to avoid.
The same is true with your financial statements. The business must be able to turn a profit in a healthy way. Combined with the other factors that we discussed earlier the lender will determine the most suitable factor rate based on your financial statements. By knowing the determining factors, you can lower the cost of using business loans significantly.