Many newly self-employed people often fail to take into account that most commercial invoices are paid on 60-day terms. This detail may seem very minor, but it can have significant implications for your business.
For the self-employed, client payments often serve as their own paychecks. Self-employed professionals who don’t plan for client payments taking up to 60 days could face serious financial problems.
Build a cash reserve
One way to solve this problem is to build a cash reserve for living expenses. Many experts recommend saving a couple months’ worth of expenses in a bank account — ready for emergencies. In fact, keeping about six months of expense reserves is probably a good idea.
However, building a reserve can be very difficult, especially when you are just starting out as a self-employed professional. Ideally, you should have built your reserve before starting out; but if you have not, you should build one slowly.
However, if you have cash flow problems and don’t have a reserve, consider using business financing to bridge the gap. Read “How to finance a business.”
Where to get business financing?
For many professionals, getting business financing is easier said than done. For the self-employed, there are few options other than using personal credit or their home to get financing. Most large banks do not offer self employed business loans.
One great option that few small business owners know about is the SBA Microloan Program, a program created to help individuals starting small businesses. It also offers additional resources, such as consulting, to help ensure your success.
However, if your main problem is that your clients are paying in 60 days and you need to get paid sooner, consider small business factoring. This solution solves the problem of slow-paying clients, improves your cash flow, and is available to the self-employed.
How does small business factoring work?
Small business factoring works only if your clients have good commercial credit. A factoring company buys your invoices and provides you with an immediate advance payment on them. You get the funds, while the factor waits for your customer to pay the invoices on their usual terms.
Factoring companies earn money by charging a fee for their service — often a percentage of the invoice. Many small business factors have programs specifically targeted to self-employed professionals and can provide flexible funding.
How do you qualify?
Most factoring companies consider your invoices to be the most important collateral that they can finance. As a result, having invoices from creditworthy commercial clients is vital; however, it is not the only requirement. Your company should also be well managed, have good billing practices, and not have serious legal or tax problems.
Also, most factoring lines can be underwritten fairly quickly and can be deployed in less than two weeks. These aspects of small business factoring make it an ideal solution for self-employed professionals that have cash flow problems but work with great clients.
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 at (877) 300 3258.