Navigating the unpredictable waters of starting a new business is challenging at best – advanced planning, preparation and good management can overcome a significant number of tests and trials that typically pop up as barriers to success. Be sure to have a business plan in place that detail actions to be taken, resources required and an anticipated timeline for achieving your business goals. For new companies, start-up financing can be a major stumbling block and one of the most difficult resources to plan for.
Commercial banks have progressively restricted credit to small and mid-size companies in favor of servicing larger corporate accounts. This trend has severely limited SMEs ability to start, grow and develop new opportunities. To fill this need, non-bank lenders have streamlined an alternative financial strategy to provide easy access to working capital for SMEs of all sizes and in all stages of development. Invoice factoring is a mainstream alternative financial strategy used by a growing number of companies to support operations and fund growth. It is structured specifically for small and mid-size companies at any stage of development. Whether your company needs financing to start-up, or is an established company needing the financial backing to grow, invoice factoring provides scalable access to working capital. Easy qualification requirements and simple to manage, invoice factoring is an ideal solution for new business financing.
How can a new business be turned down by the banks but qualify for invoice factoring?
Banks are very cautious, risk averse and profit driven. Their criteria for qualification is based on past operational performance of the business and the five Cs of credit. Further, strict covenants are applied to the loan which if broken will trigger an immediate corrective action by the bank, usually resulting in the loan being recalled. These requirements severely limit a company’s ability to acquire and maintain a business loan from a bank – to obtain start-up financing can be next to impossible.
Alternative lenders have a completely different approach to lending and set far less restrictive requirements when qualifying a business for invoice factoring. Instead of basing credit decisions on the company’s cash flow and operational performance, alternative lenders consider the credit worthiness of the company’s customer base. By using this criteria, invoice factoring companies are happy to work with new businesses despite the fact that they have no credit history. If the new business has invoices and good debtors (the company’s customers) it is a good candidate for invoice factoring.
How does Invoice factoring work?
Invoice factoring is a financial transaction and a type of debtor finance in which a business sells its accounts receivable (invoices) to a third party (called a factor) at a discount in exchange for immediate cash. It is a simple process:
- the company delivers its product or service, invoices the customer and submits a copy invoice to the factor for immediate payment.
- The factor verifies the invoice and deposits an advance payment of up to 90% of the invoice face value directly into the company’s account within 24 hours. The balance owing is held as a reserve.
- The factor manages collections and when full payment is received from the company’s customer, the factor releases the reserve amount and deposits it directly into the company’s account.
- A small fee is deducted from either the advance or the reserve and the transaction is complete.
Why use invoice factoring?
The ease of use and flexibility of invoice factoring allows a new business to fund operations and fuel rapid growth. It is commonly used to:
Improve access to working capital: Working capital is the difference between a company’s current assets and its current liabilities. It is required to cover all of a company’s short term expenses (expenses due within one year). Working capital is used to purchase inventory, pay short-term debt, cover overhead and day-to-day operating expenses. It can bridge the gap between customer orders and supplier payments to help the company meet its funding obligations.
The amount of working capital needed for a company to run smoothly varies widely and can fluctuate to cope with expenses that ebb and flow seasonally. Invoice factoring scales up and down keeping pace with the amount of business the company is conducting. The more invoices are generated, the more working capital becomes available.
Fund business growth: To meet business opportunities companies need to grow. Expanding a business often requires the purchase of new tools, machinery, IT equipment or vehicles. While the company may have sufficient working capital to cover current expenses, it may lack the funds needed to acquire new premises, hire additional staff or expand their products and services. By converting invoices into fast cash, businesses can immediately utilize revenues rather than wait 30, 60 or 90 days to collect. Now they have the ability to gear up quickly for new or expanding operations.
What are the Benefits of Invoice Factoring for Start-Ups?
As a solution for start-up financing, invoice factoring is unparalleled – it is much easier to qualify for than a traditional bank loan, and less consideration is given to how long a company has been in business or their credit history. Accounts receivables factoring is a good option for all types of businesses to consider – for start-up financing, it’s a great option!
- Easy qualification: No credit history – no problem. Factors consider the credit strength of your customer base.
- Fast access to cash: Invoices are converted to cash and deposited into your account within 24 hours for easy access to working capital.
- Build credit history: Pay bills on time and service lingering debt payments to establish a clean history and build a healthy credit score.
- Cost effective: Pay fees on usage rather than a monthly obligation to pay interest on debt accrued.
- Cost free collections: A team of industry experts take on the responsibility of collecting payment from your customers. Trained to be effective yet courteous, these professionals improve accounts receivable management, handle invoice disputes and maintain healthy customer relations all at no additional cost.
- Easy to manage: A reputable factoring company appoints a dedicated account manager to guide you through the process of funding, streamline services and ensure quick response to any issues that arise.
- Full transparency: Access to your account is 24/7 through an online portal showing all transactions in real time. Balances, historical records, credit limits and more are all available providing full transparency and to assist preparing for tax reporting.
How to Choose the Right Factoring Company for your New Business
Your chosen factoring company is your financial partner – it is essential to choose a reputable factoring company you can trust and that will work well with both you and your customers. Check the company’s website for reviews and testimonials plus visit independent consumer review websites such as Trustpilot for more impartial reviews. In all likelihood your first contact with the factoring company will be with a member of their sales team. If this contact knows your industry, is open and easy to deal with then it’s a good indication the people you work with to process funding will be much the same. Finally, check the fine print on the factoring contract carefully before committing to any one factoring company, ensure there are no hidden fees and no surprises.
A factoring company takes responsibility for enhancing your company’s accounts receivable management and collecting invoices. Look for a factoring company that trains their professionals to be effective yet courteous to maintain healthy relations with you and your customers.