Invoice Factoring for Start-Ups
So you finally launched your new business that has been in the works for months…maybe even years. It’s certainly a great feeling to see the countless hours of work come to fruition. Maybe you obtained personal loans from family and friends to get started, or maybe even an unsecured loan from a bank. It’s important to be prepared though, because there will come a time when you need more working capital in order to maintain operations and grow the business. According to this Entrepreneur article Cindy Yang states,
“…only half of small businesses that applied for financing in the first half of last year received any cash, according to a 10-state survey by the U.S. Federal Reserve Banks of New York, Atlanta, Cleveland and Philadelphia.”
If you’re fortunate enough to find a bank that will provide a sufficient line of credit, that will likely be your best (and cheapest) option. But, what if the banks say “no”?
The good news is that you’re certainly not out of options. We help companies facing these working capital dilemmas on a daily basis with our invoice factoring for start-ups program. As long as you are providing goods or services to other businesses, and those customers pay on terms (typically anywhere from a few days up to three months), you can factor those receivables and get paid as soon as the work has been completed.
How does invoice factoring for start-ups work?
Once you’ve completed the order for your customer and generated the invoice, you simply send a copy of the billing paperwork to the factoring company. As soon as the factoring company receives the paperwork, they will deposit an “advance” into your bank account. This advance is typically anywhere from 80 – 95% of the gross invoice value (depending on industry and customers). The factor will handle collections on your behalf and, as soon as the invoice is paid in full, the factoring company will deduct a small fee and refund the difference to you. Invoice factoring can be utilized for all of your customers, or just a select group of customers that pay on terms outside of your comfort zone.
What if I have poor credit?
Factoring is based upon the credit worthiness of your customers, not you. For example, we have helped numerous clients who have had past bankruptcies, tax liens, and other red marks on their credit.
What are typical invoice factoring rates?
Aside from the advance rate mentioned above, the other important item to consider is the “factoring fee”. This is the actual “rate” that is charged for each invoice. While it is nearly impossible to list general factoring fees without having additional information such as your industry, a customer list, and expected factoring volume, most fees range from under 1% up to 3-4% per invoice. However, this is a rather vague range as there are numerous fee structures. A reputable factoring company will walk you through this process, issue a detailed proposal, and answer your questions to ensure there is no confusion.
What if I haven’t started billing customers yet?
Since we work with true start-up companies, we will be happy to help you set up a factoring account before you begin billing customers. This should help to alleviate the anxiety of navigating the process once you are up and running and are already in need of capital. If your account is established before you begin billing, you can feel confident knowing that you have a working capital partner standing behind you every step of the way.
If you have additional questions, feel free to browse our Factoring Questions page or simply Contact Us at your convenience. We’ll be happy to answer any questions you may have about factoring for start-ups and can help launch your business to the next level.