Last Updated on August 26, 2021
Anyone who has started a business understands the immense challenges of getting it to the next level where it can grow and prosper.
The central challenge for startup businesses is having sufficient working capital on hand to manage operations and pursue growth opportunities. In fact, the working capital requirements of startups can actually become a growth inhibitor, except when factoring is used.
What Financing Options do Startup Businesses Have?
Startup businesses typically have no credit standing which makes it difficult if not impossible to obtain traditional financing through a bank. The process of qualifying for bank financing can be extremely cumbersome and lengthy with no guarantee of a successful outcome.
Some startups might seek funding through venture capitalist, which is fine if you don’t mind parting with equity and turning partial control of your business over to the venture capitalist. VC funding is not very practical for startup businesses that only require small injections of capital.
If you have already hit up family and friends for help, the only other option is to bootstrap your business and resign yourself to growing it slow. That could be the death-knell for any business trying to survive in a competitive market.
None of these are good options for startup businesses with growth ambitions that are unable or unwilling to take on debt or give up control of their business.
Invoice Factoring: Turning Business Assets into Cash
Instead of looking outward for unappealing financing alternatives, startup businesses can look inward, using their unpaid invoices as a readily available source of working capital. This is accomplished through invoice factoring – a well-established practice of exchanging outstanding invoices for cash that is repaid when customers pay their invoices. It works like this:
A business establishes a factoring account with an invoice factor. When the business needs an injection of cash, it sells an invoice, or multiple invoices, to the factoring company. The factoring company then transfers between 80% and 90% of the invoice’s face value to the business’s bank account, holding the balance in reserve. When the business’s customer pays the invoice in full, the factoring company transfers the remaining balance less a factoring fee of 2% to 4%.
From the time the factoring account is established to the time funds are transferred takes one to three days. With an established factoring account, the exchange of invoices and cash can take place in as little as one day.
Why Invoice Factoring Makes Sense for Startups
While startup businesses may have several options for financing their working capital needs, invoice factoring may be the best option for several reasons.
1) Fast turnaround
As described above – there is no other source of financing with faster cash turnaround.
2) No credit requirements
In making their decision to approve a factoring account, factoring companies rely on the creditworthiness and financial strength of the business’s customers. While factoring companies may avoid businesses with outstanding liens or judgments, a business does not need to have established credit or a long operating history – just customers with an established payment history.
3) No debt
With invoice factoring, you are not borrowing money; you are in effect selling an asset. Therefore, the capital you receive is not a loan. Many businesses prefer invoice factoring over a bank line of credit because they don’t want to carry debt on their balance sheet.
4) Factoring is flexible
Startup companies must be nimble with the ability to quickly respond to opportunities or problems. Rather than being bogged down with a bank loan or VC commitments, businesses can turn to factoring for a quick cash infusion when the need arises. Businesses can factor as many invoices as needed to meet their needs.
5) Cheaper capital
While invoice factoring is not an inexpensive form of financing, it can be less expensive than carrying debt or giving up equity (use our equity dilution calculator to find out how much). With invoice factoring, businesses can better control their financing costs because they can control when and how much they factor. Also, considering that the factoring company takes on the responsibility of collecting payments, the business can save on staffing costs and direct resources to growing the business.
Startup businesses need working capital, but they can’t afford to take their focus off the vital issues while trying to obtain financing. Considering all the advantages of invoice factoring, it seems as if it was tailor-made for startup businesses – low cost, fast, flexible, no credit requirements. With more than 80 years working in the business community, altLINE clearly understands the challenges facing startup businesses. Contact us today to learn how altLINE can partner with your business to ensure its success.
Grey is the Director of Marketing for altLINE by The Southern Bank. With 10 years’ experience in digital marketing, content creation and small business operations, he helps businesses find the information they need to make informed decisions about invoice factoring and A/R financing.