Written by Autumn Dlugoz | Factor Finder
What is Factoring?
We get it: starting your own business is all fun and games until someone asks where the money is coming from. While there are many options for funding sources, some may be a better fit than others. Traditionally, banks don’t love startups (who knew, right?!). Therefore getting a loan is likely off the table. We’re here to explain another option: invoice factoring. Never heard of it? That’s okay—welcome to Invoice Factoring 101.
Factoring is a flexible financing solution that is a good fit for small businesses looking for an alternative way to obtain working capital. The path to a successful business can get bumpy every once in a while—factoring can help smooth out the ride.
Also known as accounts receivable factoring, factoring treats invoices as sellable assets, allowing companies to get paid faster to ensure essential operating functions and costs are covered. Invoice factoring is not a loan so there’s no debt to repay. You’re simply getting paid immediately for goods and/or services you’ve already provided, instead of waiting for your customers to pay their invoices. Once you’ve delivered a product or service to your customer, you can “sell” the invoice to a factoring company. The factoring company will advance you a portion, typically between 80%-90% of the total value, within hours of generating the invoice. The remainder is held until the invoice is paid.
Would Factoring Be a Good Fit For My Business?
If you like waiting to get paid, then no. Factoring is a viable option for almost any B2B company in any industry. If your clients typically pay in 30, 45, 60+ days and you’d benefit from getting that cash sooner, factoring could be a great solution. Factoring can help small businesses with a new or low credit score build their profile because it utilizes and leverages the strength of your customer’s creditworthiness. Using invoice factoring can help your business scale, so as you grow, so does your funding capability. Because equity and stock options are often expensive for startups, factoring allows your new business to get the funds it needs without giving up valuable ownership interest.
How Does It Work Exactly?
1) Complete/deliver your services and/or goods and invoice your customer per usual.
2) Submit a copy of your invoice(s) and supporting documentation to your factoring company.
3) Your factoring company will verify the work/delivery and then forward you money.
4) Once your clients pay the factoring company, you’ll get the remaining funds, minus a small fee for using factoring services.
5) Repeat as often as you’d like, with as many clients as you wish!
When Factoring Isn’t a Good Fit
While there are factors that will fund your first invoice(s), factoring is not an up-front lump sum to get your business up-and- running; you must have already started generating invoices for your clients. Therefore, factoring isn’t always a great fit for B2C companies. Remember, factoring is a tool to grow your business based on the credit profile of your client—the bigger and more credit-worthy, the better.
Have more questions? We’d be more than happy to help! Check out the partnership between LaunchHouse and Factor Finders. If you think factoring would be a good fit for business, we can help you get started.