Last Updated on October 21, 2022
One of the greatest challenges of running a startup business is achieving a positive cash flow to grow your company and pay expenses. Unfortunately, many startups’ finances depend on customer invoices that can take weeks or even months to be paid, creating a cycle of negative cash flow and increasing debt.
Invoice factoring for startup companies is an excellent way to keep growing your company and stay competitive because it provides you with the cash necessary to make payments and build good business relationships.
In this article, we discuss how startup invoice factoring works, its benefits, and how it compares to other financing alternatives. Read on to learn how altLINE can increase your cash flow and support business growth through invoice factoring!
What Is Startup Invoice Factoring?
Startup invoice factoring happens when your company sells invoices to a third-party finance provider like altLINE in exchange for a cash advance. Startup companies often operate on thin margins, so delayed customer payments can result in negative cash flow that hurts your business. Startup factoring is usually used to unlock working capital when you need it, removing your dependence on customer payment timelines.
Benefits Of Invoice Factoring For Startup Businesses
Startup invoice factoring companies unlock funds through cash advances when customers are slow to pay or during periods of high spending. Check out how invoice financing for startups can help you access cash when you need it:
Get Your Accounts Receivable Invoices Paid In Days, Not Months
The best startup factoring companies fund your invoices within 1 or 2 days. This means you can earn up to 90% of your hard-earned money ASAP instead of in 30, 60, or even 90 days.
Access Capital To Grow Your Business While Maintaining Equity
Startup owners often consider giving up equity to fuel growth, but invoice factoring can set them up for long-term success. Factoring your startup invoices provides quick cash to pursue growth opportunities, pay debts, and meet payroll while keeping equity intact.
Get Cash When You Need It Most
Starting a business is hard enough as it is, but slow payments and delinquent customers can create additional stress, leaving you to scramble to find capital to pay your financial obligations..
Instead of worrying over customer payments, factoring your invoices with altLINE increases cash flow to ensure your company stays financially healthy all year round.
How Does Invoice Factoring Work for Startup Companies?
Startup factoring with altLINE works by turning unpaid invoices into cash advances to fund growth, pay operating expenses, and reduce your stress as a new business owner. Instead of waiting on customers to pay their invoices, you can use invoice factoring to get cash whenever you need it. Submitting startup invoices to factoring companies also softens the financial blow of late payments.
Here is a quick guide to how altLINE’s invoice factoring services work.
Submit Your Unpaid Invoices
altLINE accepts all types of outstanding invoices, though we favor ones charged to creditworthy customers or large and medium-sized companies. Additionally, we do not factor invoices for customers who consistently make late payments.
If your invoice turnover time is between 30 and 90 days and your customers regularly make on-time payments, then your receivables are well-positioned for factoring.
altLINE Advances Up To 80-90% Of The Invoice Face Value
You can generally expect a factoring advance rate of 80-90% of every invoice’s face value and receive the cash advance between 24 and 48 hours of submission to altLINE. The exact timing of our cash advance deposit may vary depending on when your customer receives your goods or services.
altLINE Helps Collect Payment For Your Outstanding Invoices
altLINE assists your company by providing a secure lockbox to contain payments and reporting all collections through an online portal. If issues arise, we will work with you to communicate with your customers to resolve disputes professionally, so you can maintain good business relationships.
altLINE Pays Out The Remaining Unpaid Invoice
After payment collection, we deduct our factoring fee (typically 1-5% of your invoice) and transfer the remaining invoice value to your company.
Uses For Cash From Factoring
Receiving cash advances from startup invoice factoring services means you do not have to wait on customer payments to fund your business. Instead, you can accelerate the payment cycle and unlock growth capital to further business development. Here are some ways you can use invoice factoring cash advances:
Paying startup employees on time is essential to running a successful business. Unfortunately, slow customer payments often lead to late paydays, causing employee dissatisfaction, reduced productivity, and staffing shortages. Startup invoice factoring gives you a cash advance to meet payroll on time, avoiding complaints and issues with late payments.
Take On New Customers and Orders
As a startup, you don’t want to sacrifice taking on new orders or closing your next big deal because one of your customers has not paid you yet. Long invoice payment terms should not dictate your business’ financial health or growth. Startup invoice factoring lets you buy everything you need to complete jobs and develop your business without waiting for customer payments or sacrificing equity.
Pay Operating Expenses
Startups typically have operating expenses like building rentals, utilities, marketing expenses, and inventory.. Unfortunately, having a negative cash flow makes paying for these costs difficult. Extra funds from invoice factoring help you pay these obligations without relying on equity or assets.
Startup Businesses We Fund And Finance
altLINE provides factoring for small businesses and startups to help them get funding when they need it and promote their growth. Here are some examples of startup businesses we factor for:
- Big and small business startups
- Startup staffing agencies
- New wholesalers and distributors
- Social and non-profit startups
- Buyable and scalable startups
- Offshoot startups
- Professional services startups
Factoring Your Startup Invoices vs Other Funding Options
In addition to invoice factoring, you have a few other startup funding options. What are those options, and how do they stack up against invoice factoring for startup businesses? Here is a comparison between invoice factoring the other common financing methods:
Startup Factoring vs Bank Line Of Credit
A bank line of credit is frequently the first financing solution a business considers. While many startups can qualify for a line of credit, the funds may not be enough to develop their businesses.
Banks approve your line of credit application by reviewing your credit profile and fixed assets. Getting a bank line of credit as a startup company is typically tougher because you may not have many fixed assets to collateralize. Even if you can get a line of credit, low lending limits mean you may not get enough money to fulfill the financial obligations that you needed capital for in the first place.
Factoring is typically a better option for startups because the factoring company looks at your customers to approve funding instead of your fixed assets. If you work with an established customer base, factoring companies will give you enough working capital when banks cannot.
Startup Factoring vs ACH/MCA Loans
ACH (automated clearing house) and MCA (merchant cash advance) loans can be tempting for a new business because you can qualify for them simply by providing a bank statement for review.
Moreover, ACH and MCA loans only take one or two business days to approve, making them great for a quick cash boost.
However, you should consider that ACH and MCA loans have high lender and interest fees that can reach up to 60% of your original loan, which can put your new business in financial trouble if you can’t afford to pay these fees.
Startup factoring is typically the safer option because you only get cash advances on invoices that customers will pay. This way, you don’t have to stress about repaying any debt, while having access to working capital before customers pay.
Startup Factoring vs Quick Pay Discounts
Offering customers a discount when they pay before the invoice is due can accelerate cash flow when needed. This simple method does not require a third party, but its success hinges on your customer’s priorities. If your customer prioritizes having more cash on hand over receiving a discount, they may not take your offer and instead pay when the invoice is due, leaving you low on cash and unable to grow your business.
Startup factoring is generally more reliable because, as long as your invoices are approved, you will receive a cash advance before the standard net 30 or net 60 payment cycle.
Typical Factoring Rates And Fees
Invoice factoring rates are determined by how much you plan to factor and how long customers take to pay. Factoring more invoices and getting customers to pay faster can lead to lower processing rates. Our additional considerations include your customer base’s credit quality, diversity, and your tenure in the business.
Factoring fees comprise two elements:
- Initial fee: This fee covers your cash advance processing expenses for an initial set duration (typically the first 30 days) and costs up to 3.50% of your invoice face value.
- Incremental fees: These fees cover all additional expenses as the unpaid invoice ages beyond the initial duration and cost up to 1.50% of its total value per charge. The incremental fees also typically increase the longer an invoice remains outstanding, so factoring invoices that your customers are likely to pay during the time covered by the initial fee can lead to lower rates.
Requirements To Apply For Startup Factoring
You need to apply for startup invoice factoring before you can be eligible to receive a cash advance. Here are the documents you need to do so:
List Of Existing And Potential Customers
altLINE needs a list of your existing and potential customers as part of your factoring application. We need this list to review your customers’ credit profiles and determine their factoring eligibility.
You need to complete an application form as part of the invoice factoring process. We also need these documents enclosed with your application:
- Business ownership identification
- Personal identification
- Employer Identification Number
- Customer contracts
- Articles of incorporation and other relevant corporate documents
Accounts Receivable Aging Report
Accounts receivable aging reports record outstanding invoices based on when they’re due. We need this report to research customer payment behaviors as part of the factoring approval process. We will consider invoices that are 30 to 90 days outstanding, but invoices for customers who state an inability to pay may not be eligible for factoring.
Frequently Asked Questions About Our Factoring Services
Here are some common questions about factoring for startup companies answered:
Do you need to run a credit check before getting started?
altLINE runs a credit and background check on all startup company owners that apply for our factoring services. However, there are no minimum credit thresholds for approval. Background checks are reviewed for financial-related crimes or felonies. In the event a borrower has a spotty background, approval with altLINE may be in question, but in the event the borrower is disqualified, altLINE will often work with the borrower to identify a startup factor that is willing to help.
Do you require UCC filings when factoring startup invoices?
Upon executing a term sheet, altLINE will file a UCC on the client’s business. This UCC filing allows altLINE to properly secure the collateral (i.e. the invoices) it plans to advance against when the factoring facility is in place. UCC filings are an integral part of any form of lending.
Is startup factoring a debt or loan?
Startup factoring is neither debt nor a loan. Invoice factoring is the sale of your invoices to a third party. The money advanced against these invoices will be repaid by your customers. However, altLINE is a recourse factor, so you may need to pay the cash advance back if your customer fails to pay their invoice.
Related: Recourse Vs. Non-Recourse Factoring
Do you offer non-recourse startup factoring?
altLINE only offers recourse startup factoring. While you must repay the cash advance if your customer fails to pay, recourse factoring structures often allow for factors to extend lower rates and larger credit limits on your customers.
Grey was previously the Director of Marketing for altLINE by The Southern Bank. With 10 years’ experience in digital marketing, content creation and small business operations, he helped businesses find the information they needed to make informed decisions about invoice factoring and A/R financing.