Finding the right financing can be difficult for IT companies because the business has become so competitive and commoditized. However, an information technology company needs to be well funded to succeed in the marketplace. This predicament creates a catch-22 for company founders and entrepreneurs who need funding in order to grow the company to its potential but can’t find it.
There are a number of ways to finance an IT business. Most startup companies are financed by owners who invest their own seed capital. Others are able to raise capital by asking friends and associates to invest in their venture. Owners with the right contacts can get private financing through an angel investor or a specialized venture capitalist.
While these alternatives have some benefits, they are often difficult to get — especially angel investors or venture capitalists — and they also require that you surrender an equity stake in your company, causing you to lose some independence.
Unconventional solutions can be more effective
Some financial tools enable you to grow your information technology company organically without giving up equity. Companies use these unconventional tools with two possible strategies in mind:
- To grow the company and increase it’s valuation, enabling it to secure a more favorable equity investment in the future.
- To use it as a stepping-stone to conventional bank financing.
Technology firms often derive revenues from equipment sales, services, or both. We are focusing on two solutions that enable you to finance these types of projects.
How to finance IT equipment sales: purchase order financing
Unless your company is well funded, handling a large equipment order can be challenging. Most suppliers demand upfront payment before selling equipment. On the other hand, most customers pay you 30 to 60 days after invoicing. Without financing, your company is caught in the middle and has to decline the order.
One alternative gaining traction in the industry is purchase order financing. Purchase order funding enables you to finance equipment sales in which your company resells equipment without any modifications, or installation services. A purchase order finance company handles your supplier payment for a confirmed purchase order from a qualified customer. This allows your supplier to ship the equipment and you to fulfill the order. The transaction settles once your customer pays for the goods on their usual schedule.
However, purchase order financing is not for everyone and works best for companies with high gross margins.
How to finance IT consulting projects: receivables financing
One of the challenges of software development projects is that customers often pay invoices 30 to 70 days after accepting the deliverable. Few IT companies can afford to wait this long because they have to pay their software engineers on a monthly or biweekly basis. Unless the company has financial reserves to meet payroll, this delay can lead to cash flow problems.
You can solve this problem by financing your receivables with a factoring company. The factor can advance funds using your slow-paying invoices from creditworthy customers as collateral. Receivables financing provides operating funds enabling you to run your business without cash flow shortages. The factoring transactions settle once your customer pays their invoices.
Advantages of purchase order financing and receivables financing
These solutions offer three important advantages:
- Financing is flexible and is tied to the size of your orders and invoices. The line is designed to grow as your revenues increase, providing the cash flow you need to execute your business plan.
- Qualifying for this type of funding is faster and easier than for conventional solutions. The most important requirement is to have customers with solid commercial credit. Aside from that, your invoices must not be encumbered by liens and your company should not have serious tax or legal issues.
- These solutions allow you to grow your company by using its own cash flow and without giving up any equity positions. This advantages makes them ideal options for technology companies that have growth potential but are being held back by lack of working capital.