Why Does Factoring Work For Startups?

Many times you can use a strategy, such as factoring even in the early stages of your business. The factoring company, unlike the bank, is examining your customer’s creditworthiness, not the creditworthiness or profitability of your new venture. They also do not require a piece of ownership like a venture capitalist will.

How does factoring work for a startup business?

You receive cash from the factoring company based on the value of your accounts receivable or invoices.  The factor typically gives you 80% to 90% of the value of your invoices upfront and then the remainder when the payments are collected less the factoring fee. The factoring fee is around 1% to 3%. Many business owners prefer this fee to venture capital and the ownership shares attached to it. You can get the initial upfront cash in as little as 24 to 48 hours and invest it back in your business to create the next batch of products, provide the next round of services or intensify your marketing and sales efforts.

Some entrepreneurs will utilize factoring as a short-term solution until the cash flow of the startup evens out, but others will continue to use factoring as a long-term financing strategy. Here’s why.

  • They find that the factor requires much less paperwork and does not interfere with their business as much as a bank.
  • The factor company saves the business from the time, hassle and employees it takes to collect accounts receivable payments. Factoring companies are experts at collecting payments on invoices.

By outsourcing accounts receivable to the factor, the startup is able to focus on what they do best: Bringing an innovative product or service to the marketplace and expanding their market share.

How can I learn more?

If your business is in the startup phase or early stages of growth and needs a cash infusion, I encourage you to contact us and see if factoring can provide a better solution for financing your enterprise than taking on investors.

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