THE Guide: Why Does Factoring Work For Startups?

Factoring for startups

Being a startup business comes with a ton of challenges. You’re a small team of people, which means you are all having to wear multiple hats, perhaps certain tasks are falling through the cracks, and scaling up can seem next to impossible. The one thing that you really don’t want to have to worry about is working capital! You’re under enough pressure to manage your team, meet client needs, and ensure you’re experiencing growth, why hold on to added pressure of making sure that you have the funds to pay your employees, purchase supplies, and continue your day-to-day?

Working capital requirements can very quickly become a growth inhibitor to a new business. This is because startups lack credit history and therefore business owners typically find that they have limited options to get financing. They often turn to family and friends, pitch their business to investors, or simply bootstrap the business and grow at a much slower rate than what may be possible with financial backing.

In this article, we will discuss everything you need to know about invoice factoring for startups and why it’s a great option.

What Is Invoice Factoring?

Invoice Factoring is ultimately a cash flow solution. It is a kind of working capital that is used specifically for temporary staffing companies. It is a service that allows staffing companies to have access to between 90 and 95 percent of their outstanding accounts receivable upfront so they can compensate their staff and pay for any other expenses they have incurred.

Staffing companies use Invoice Factoring because regardless of if their clients pay in seven days or 90 days, the cash is there for them to meet payroll requirements. By using Invoice Factoring in your overall business strategy, you can grow your staffing company without the financial limitations that come with having available cash for payroll.

Is Invoice Factoring Similar To A Bank Line Of Credit?

The simple answer is, yes. There are similarities between Invoice Factoring and a bank line of credit, however, there are crucial differences that make Invoice Factoring a much better option for startups.

Invoice Factoring provides more flexibility when it comes to who is approved. As a startup, you will find that banks flag you as high-risk and either deny your application for line of credit all together, or you will end up receiving an insufficient amount.

No Business Credit History Needed

When applying for Invoice Factoring, it is not based off of your business’s age or credit history. While it is based off of a number of other things, one of these things is the likelihood that your client will pay their invoice. This means that if you are a startup, you don’t have to worry about your lack of credit history. It simply isn’t a factor here.

Set Interest Rates

With bank lines of credit, they will always tell you that the conditions in your contract may change without notice. This includes interest rates going up or increases in fees. This does not occur with Invoice Factoring. When you decide to move forward with a factoring company, you will be provided with your set rates and fees, which will help you avoid any unwanted surprises in the future.

How Does Invoice Factoring Work For Startups?

A factoring company issues funds based on outstanding invoices/accounts receivable. So, once a startup has an agreement with a factoring company, then submit copies of their outstanding invoices to the factoring company. The factoring company will then verify the work is done and, in most cases, will advance between 80-90 percent of the invoice value. This enables the startup business to have access to cash or working capital for their business within hours of creating their first ever invoice. This enables a startup to:

  • Make payroll
  • Buy more inventory
  • Re-invest in the business in whatever way makes the most sense

    Once the invoice is paid by the startup's customer, the factoring company would receive a small fee for providing the service. This fee is generally around 1.5 percent of the invoice value depending on how long the client takes to pay, and the startup would receive the rest at that time.

    As businesses are constantly generating invoices for work completed, this can act as a type of line of credit that will continue to grow as the startup grows.

    How Can Startups Qualify?

    Applying and qualifying for Invoice Factoring is a fairly simple and straightforward process, which is even more beneficial due to the fact that as a startup, you’re juggling multiple tasks and wearing many hats. Taking large amounts of time to dig through paperwork to apply for a loan isn’t necessarily how you want to be spending your valuable time.

    If the factoring company can understand a simple set of facts, then generally qualifying is not an issue. Here are the two main things an Invoice Factoring company needs to understand in order to determine whether or not you qualify:

    1. Is this a business to business (B2B) or business to government (B2G) invoice for a product or service that has been delivered or completed?
    2. Is the account debtor or customer able to pay the invoice?

    If these things can be determined along with the fact that a business doesn’t have some “going concern” or the business is not likely to go bankrupt, then typically they will be a candidate for Invoice Factoring.

    Like we said previously, factoring does not require a certain credit score, it does not require years in business, and it is not decided by a computer algorithm. For this reason, invoice factoring has proven in its different forms over the centuries, that it is a very valuable tool for a growing business that needs a finance partner to improve cash flow.

    Getting Your Invoice Factoring Setup

    At Meritus Capital, we find getting a startup set up with us can be the best, easiest and quickest time to do so as there is no entity history, previous bank loans, filings, suits or the like to complicate the process. Here are a few key points about the process.

    1. We have a quick and easy online application that can be filled out and where select documents can be uploaded.
    2. Once we agree to the basic terms, we will provide you with a contract to sign.
    3. We can go from start to funding sometimes in as little as a few days to a week!

    If you have any more questions, please reach out to anyone on our team.

    Getting Funding Isn’t Impossible

    As a startup, most investors, banks, etc, look at you as high-risk. You simply do not have the proven track record that is needed to show whether or not you are a good investment. This is why factoring has been the go-to option for startups for quite some time!

    With no business credit history needed and a short list of requirements, it’s typically easy for a startup to qualify for Invoice Factoring. If you’re ready to stop worrying about paying your employees and keeping up on other expenses, then Invoice Factoring is a great option for you and your business.

    Startup Funding From Meritus Capital

    If you have any further questions about invoice factoring for startup businesses, feel free to reach out to us here at Meritus Capital anytime by email at info@merituscapital.com or call us toll-free at 1-877-648-3709. We have been providing factoring services to businesses across the U.S and Canada for almost 20 years!

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