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Financing a New Company by Factoring Invoices

by Marco Terry • 2020-01-25

Securing funding for a new venture has always been a challenge for business owners. Ensuring that the company has the proper level of financing is one of the most critical tasks. However, finding financing for a new venture can be very hard. On one side, you can try and secure venture or angel funding. This type of funding will require that you give up a portion of your equity/ownership in the business. It means you will end up with additional partners, or managers, in your company.

Another route consists of trying to get conventional business financing, such as business loan. However, few startups can get business loans because most financial institutions require that the company have a track record of successful operations and substantial assets. Since most startups don't have long track records and have few assets, few can meet these requirements.

Cash flow can even be more problematic for companies that sell to other businesses or to government agencies. This is because they usually have to invoice when they deliver the goods, and then wait 30 to 60 days to get paid. Growing a business while waiting a month or two to get paid can be hard to do. Many times growth is delayed and opportunities are passed. This is an alternative however. What would happen if you could get your invoices paid in 1 or 2 business days and essentially ran a cash business? Would you still need financing? Would you still turn away opportunities?

This can be accomplished by using a neat financial trick, factoring your invoices. Invoice factoring enables you to get a substantial portion of your invoices paid immediately, providing you with the funds you need to pay suppliers and employees. More important, you get the funds you need to keep up with your growing orders.

If you have a business that is firing on all cylinders, factoring accounts receivable can really help fuel your company's growth. Factoring offers a simple proposition. A finance company, called a factoring company, advances you up to 80% of the net value of your invoices. You get the immediate funds while the factoring company waits to get paid. Once they get paid, you get the remaining 20%, less the factoring fee.

One of the more important features of factoring is that factors biggest criteria (though not the only one) for providing financing is the quality of your clients. This means that if you do business with large credit worthy companies you stand a good chance of qualifying for financing.

Furthermore, factoring can be setup quickly. Usually it takes a week or two to set up an account, and after that, funding can be done daily. Although factoring financing has been around for a long time, it has been gaining traction and notoriety recently as a solution for growing companies. It offers great flexibility, as your financing is determined by your sales and the quality of your clients. This makes it a great solution for companies whose biggest asset is the clients that they do business with.

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