Using Invoice Factoring to Finance Startups

One of the main challenges for startup founders is securing financing for their businesses. For many, it’s an ongoing challenge that is part of their fight for survival. Unfortunately, most startups don’t get funding. Instead, the founders and employees must bootstrap the business and make the best of their resources – and ingenuity.

Looking for financing in all the wrong places

Part of the problem is that most entrepreneurs look for funding in the wrong places. They focus their energies trying to secure venture capital or angel financing. While these options are very popular, few select entrepreneurs are able to secure this type of funding. The vast majority of entrepreneurs are simply left by the wayside and never get funded.

Getting other types of financing is not easy either. Banks seldom finance startups. They focus on companies that have hard assets that can be used as collateral. Another common financing alternative – friends and family – also has its own drawbacks and challenges.

However, not all financial problems require conventional financing. One form of financing can help startups that have cash flow problems because they sell products and services to commercial clients who pay invoices in 30 to 90 days.

Working with commercial clients? Expect slow payments

The greatest drawback of selling products and services to large companies is that they pay invoices in 30 to 90 days. This common invoicing practice is known as “offering payment terms.” Large companies demand payment terms because it improves their cash flow. They get to use your products/services for a few months before having to pay.

Few startups plan for payment terms in their financial forecasts. However, this issue is critical. Slow payments can quickly erode your startup’s financial reserves. The effect is more severe if you are growing quickly. Eventually, you can reach a point where most of your funds are tied to slow-paying invoices. This scenario leaves you with little cash to pay company expenses.

This situation is fairly common with underfunded startups. It can also lead to an early demise.

Your first option: offer early-payment discounts

If your company is at risk of running out of funds in the near future, consider offering a discount to clients in exchange for a quick payment. The process is fairly simple. Ask your clients if they are willing to pay you within ten days in exchange for a 2% discount. Note that the actual discount varies.

The advantage of this program is that it’s simple to implement. However, it has some drawbacks. Some of your clients may abuse it – taking the discount but still paying slowly. Trying to rectify this situation can lead to customer issues. Furthermore, the quick payments are optional. Your client will take them only if and when they are to their advantage. Therefore, early-payment discounts can improve things but do not provide predictable cash flow.

A better option: finance your accounts receivable

If your primary financial issue is that clients are paying slowly, the solution is to use invoice factoring. Invoice factoring allows you to finance slow-paying receivables. Instead of waiting 30 to 90 days to get paid, you get immediate funds from the factoring company. Your startup gets the money it needs to pay expenses, while the factor holds the invoice until payment.

The finance transactions settle once your customer pays their invoices in full. Many startups factor their accounts receivable regularly, using it as a revolving line of financing. To learn more, review these invoice factoring examples.

Available to startups

Unlike most conventional sources of financing, factoring is available to startups. It is relatively easy to get. The factoring company finances your invoices based on their credit strength. This last point is important. The strength of your clients is the factor’s main concern when underwriting a transaction.

Factors look for startup companies that have:

  1. Strong commercial clients
  2. Unencumbered invoices
  3. Solid market strategies
  4. A savvy founder (or co-founders)

Advantages

A significant advantage that financing accounts receivable offers to your startup is improved cash flow. Instead of waiting a month or two for payment, you can get funds in days. However, improved cash flow is not the only, nor the most important, advantage.

The factoring line is tied to your sales. Therefore, it’s flexible. The line can increase quickly – sometimes automatically – to accommodate growing sales. This benefit is attractive to startups that are growing quickly.

Lastly, invoice factoring can help you reduce bad debt. Bad debt is created by clients who don’t pay. Factors excel at determining the credit of a company and can advise you whether a potential client can be a good payer or not.

Need factoring to finance your startup?

We are a leading factoring company and can provide competitive funding for startups. For a competitive quote, fill out this form or call us toll-free at (877) 300 3258.