The greatest challenge an entrepreneur or start up faces is raising capital to finance the new venture. Business plan in place, financing is the next step. A traditional business loan requires specific criteria, and most new businesses will not qualify. A traditional bank loan requires the business owner to have good credit and usually 2-3 years or more in business with a proven success record. Cash is the blood line for any business. Fixed expenses such as rent, payroll, product, and insurance have to be paid. When cash is slow, or the business is new and has receivables owed to them waiting for customers to pay, these expenses can become problematic.
Many entrepreneurs and start up business owners are turning to invoice factoring, or receivable financing for a solution to cash flow problems. Most invoice factoring companies will accept new businesses who have performed a service or delivered product to a customer. There is no required length of time in business with many factoring companies. So, let’s look at the differences between traditional lending and invoice factoring.
Traditional Bank Loan Invoice Factoring
- Requires 2-3 years proven success Will work with start-ups
- Requires good credit score and Based on client’s customer’s creditworthiness
operating history for owner and business
- Can take up to a month to get approval or denial Business can be approved in 2-3 days
with simple terms
- Incurs loan debt and interest to be repaid personally Does not incur debt
As well as for the business.
- No flexibility, must abide by Federal Banking Can be long or short-term
- Cap on amount loaned Unlimited funding
- Annual renewal often requires
audited statement and personal financials.
- Will work with start-ups
- Based on client’s customer’s creditworthiness
- Business can be approved in 2-3 days with simple terms
- Does not incur debt
- Can be long or short-term
- Unlimited funding
- May require business unaudited business financials
- Assistance with collections
- Funding within 24 hours of submission of invoices
- Will run credit and set up credit limits for you
Cash flow is the blood line of a business. Payroll, rent, product and other operational expenses are ongoing. When a company is low on cash, the business suffers. Invoice factoring provides a solution to keep a positive cash flow and allow for growth of the business. This is beneficial for entrepreneurs and start-ups as well as growing companies.
Banks require a proven track record, operating history and credit score, which is why invoice factoring is a great option for start-ups and growth companies. A factoring company considers the creditworthiness of the customers of the business, and their ability to pay, so the credit of the business owner is not the basis for success. Banks follow Federal Banking Laws and there is a great deal of paperwork and documentation involved. Annual financial statements are required and often require auditing. Traditional loans can take several weeks to process for approval, resulting in lost time if the business owner is denied. A factoring company can approve the account in 2-3 business days and rates are very clear. No debt is incurred because the business is using revenues due as collateral for the invoices. There is the potential for unlimited funding and the business owner is not required to sell all of their invoices to the factoring company, only the ones they choose to sell. Factoring can be set up for long or short term as most businesses become qualified for a bank loan at some point. Factoring companies usually assist with collections on delinquent accounts as well. And, funding on the invoices submitted is within 24 hours.
How Does Invoice Factoring Work?
The factoring company and the business owner agree on rates and fees and sign a contract. The business owner submits a “Schedule of Accounts”, which is a listing of the invoices to be sold to the factoring company, along with the invoices and sing-offs or additional verification. The factoring company processes the invoices and wires the business 85-95% of the total of the invoices the next business day. The additional amount goes into a “reserve” until payment is received by the factoring company. The factoring company waits the 30-90 days for the invoices to be paid directly to them, and once they are paid, the business gets the additional percentage from “reserve” less the agreed upon fees.
It is simple:
• Send in invoices with a schedule of accounts
• Receive 85-95% within next business day
• Receive “reserve”, less fees when the invoices are paid.
The factoring company will run credit on your potential customers and set credit limits for you. Some accounts may be 45, 60 or 90 day. Most factoring companies have portals online so the business owner can see his ageing of accounts and where his reserve stands on a daily basis. These additional benefits also give the entrepreneur more time to promote the business with no worries regarding cash flow and capital to grow the business and can keep up with AR online.
Invoice factoring has been around for centuries in various forms. In today’s time, it is becoming more and more of a go-to for entrepreneurs and start-ups in the growth phase. The ease of the process for invoice factoring, and the fact that operational history and credit are not the main criteria for approval make it the perfect solution for new businesses, growth businesses and businesses struggling with cash flow problems. For these businesses Invoice factoring is the potential life line to success.