Factoring: Start-ups Have a Funding Shoulder to Lean On
Sema Fongod of Invoicediscounting.uk.com explains how factoring can be a useful business tool for start-ups in this difficult economic climate.
To be successful in your start-up venture, initial capital investment is the major issue to be focused on. New business owners tend to depend on the banks to raise capital. However, banks and other financial institutions are making life difficult for start-up owners as their credit terms are getting more and more stringent.
Start-up capital isn’t just about raising finance to get your business off its feet. It’s also about ensuring a healthy cashflow for meeting the daily operational costs of your business once it’s launched. Where do you raise funds to kick-start your business and provide on-going working capital?
Factoring is a funding solution that offers the much-needed energy boost for your business to run the start-up race. So let’s look at why and how new companies can use factoring to fuel growth in their business right from day 1.
What is Factoring anyway? How does it work?
In the modern business world, business-to-business (B2B) trading on credit terms is nothing new. Usually, a business will provide a service or sell goods to a customer and then bill them. Typically, the bill (invoice) will be help up for a period of 30-90 days. Factoring then bridges this gap by advancing finance against the value of the bill.
Here is a step-by-step guide on how factoring works:
Step 1 – Invoice customers for goods sold and/or services provided
Step 2 – Send a copy of the invoice to the lender
Step 3 – The lender advances you up to 95% of the value of the invoice, typically within 24 hours
Step 4 – The lender also handles responsibility for managing your sales ledger. This includes chasing customers and collecting invoice payments.
Step 5 – The customer completes full payment and the lender pays you the remainder invoice value balance.
Factoring can do wonders for start-ups
For new companies high on ambition but low on capital, factoring can work wonders. It can provide the much-needed funds early on in a business’ life. Not getting paid for 60-90 days can place a lot of pressure on your cashflow. Those first large orders have to be paid alongside other business start-up costs.
Citing a construction firm as an example, as soon as you fulfil your first building contract, then a lender will provide funds that you can use to settle HMRC bills, pay your employees or investing in construction equipment. If you’re a manufacturer, the funds released within 24 hours can enable you to purchase material against your next order.
The one striking point about factoring is the fact that the funds released can grow with your business. This means that as your business grows, the funds released by the lender can also increase. This gives factoring a leading edge over traditional facilities such as bank overdrafts or more formal loans which are typically a fixed, non-flexible amount. Because new starts have to pay for supplies before receiving payment from customers, factoring can be a flexible working capital solution.
Protection against bad debts
Trading with customers on credit terms is no guarantee of receiving full payment from invoiced customers. Think about it – how many high-profile companies have gone into administration? This is fast becoming a recurring headline in the press.
Should you require, factoring can be administered with a credit insurance service that covers you against any form of bad debt. This is by means of a non-recourse arrangement and the lender bears all the risks. With bad debt cover, all you need to do is sit back, relax and concentrate on doing what you do best – growing your new business.