One of the biggest challenges that an entrepreneur faces when starting a business is raising capital. Perhaps the most important decision to be made is how to finance your small business. New business owners are usually advised to not only save the start-up capital they need but to try and save up enough money to cover the first six months of the company’s overheads. When you start considering all the expenses involved in running a business for six months, including salaries, equipment, and office space rentals, it’s no wonder the idea of being an entrepreneur can be intimidating for many.
Factoring as a Funding option for Small businesses
There are many options for new business funding sources, however, some may be a better fit than others. Invoice factoring for small business companies is a flexible financing solution that is a good way for new businesses to get the cash they need to cover essential operating costs. Small business factoring works for almost any B2B company in any industry. Factoring treats your accounts receivables as sellable assets, meaning you get paid for them right away, instead of having to wait 30 or more days for your customers to pay their invoices.
Invoice factoring is often ideal for new start-ups because it’s cheaper and faster than both venture capital and bank loans. When you factor your invoices, you receive a large percentage of the invoice amount within a day or two. Factoring companies don’t assess your company’s credit history; instead, they look at the creditworthiness of your clients. Getting approval from a factoring company to factor your invoices is also a quick process.
How does it work?
A factoring company funds based on accounts receivable. So once your business has an agreement with a factoring company, your business will submit copies of the outstanding invoices to the factor. The factoring company will then verify the work is done and will advance between 90-95% of the invoice value in most cases. This enables your small business to have access to cash or working capital for your business within hours of creating their first invoice.
This allows your small business to:
- Make payroll
- Buy more inventory
- Re-invest in the business and operation
Once the invoice is paid by the small business’s customer, the factoring company would receive a small fee for providing the service and the small business would receive the rest at that time. As businesses are constantly generating invoices for work completed, this can act as a type of line of credit for new businesses that will continue to grow as they grow.
Advantages of Invoice Factoring
Beyond the reduction in time and personnel costs invoice financing provides, factoring also creates opportunities to save money. For example, many start-up companies have additional needs and costs, in addition to regular overhead. These may include expenses such as additional marketing, new equipment, tools, and additional personnel. That means every dollar needs to be carefully spent and every possible discount needs to be utilized.
A significant advantage that financing accounts receivable offers to your small business is improved cash flow. Instead of waiting a month or two for payment, you can get funds in days. However, improved cash flow is not the only, nor the most important, advantage.
The factoring line is tied to your sales. Therefore, it’s flexible. The line can increase quickly – sometimes automatically – to accommodate growing sales. This benefit is attractive to small businesses that are growing quickly.
Lastly, invoice factoring can help you reduce bad debt. Bad debt is created by clients who don’t pay. Factors excel at determining the credibility of a company and can advise you whether a potential client can be a good payer or not.
Small Business Funding at Summar
Invoice factoring through secure, dependable factoring companies is a reliable and safe method of small business financing for start-up companies. And as these companies face ever-increasing challenges, factoring has become the ideal solution to cash-flow management.
Time is money and waiting for investment companies to agree to give you funding, or for a bank to approve a loan, is time-consuming and can slow down or halt production altogether. Factoring can be more efficient/less restrictive and will allow you to make decisions to grow your business more quickly. If you have any further questions about invoice factoring for small business businesses, feel free to contact us, we have been providing factoring services to businesses across the U.S and Latin America for almost 15 years! Learn how our services can get your small business going with invoice factoring.