Receivables Factoring - How To Finance Your Business Using Your Invoices
as Collateral
Obtaining business
financing has always been challenging for small and mid size company
owners. Traditional sources of financing, such as venture capital
companies, angel investors or banks, provide financing that is hard to
obtain and usually takes weeks - or months - to set up.
Angel investors and venture
capitalists, although more generous than banks, only provide capital if
you are willing to give them an ownership stake in your company. Usually a
big one too. Banks don't demand an ownership stake. Instead, they will
only lend you money if your company can show a three-year track record of
profitability and if your personal credit record is spotless.
But, what if you don't want
to give up ownership and if you don't meet banking requirements?
There is an option that is
growing in popularity - and it provides you with easy to obtain financing.
It's called accounts receivable factoring. Factoring is an ideal tool for
companies whose biggest challenge is that they cannot afford to wait 30 to
60 days to get paid by customers. By factoring your receivables, you can
get paid in as little as two days. This helps business owners to easily
meet ongoing obligations such as payroll and rent, and allows them to grow
the business. In effect it eliminates the uncertainty of when you'll be
paid and allows you to streamline your cash flow.
Receivables factoring is
very different than a business loan or line of credit. Rather than
focusing on physical collateral (real estate, equipment, etc.) like banks
do, factoring companies focus on your invoices. Are they from good credit
worthy clients? Do they pay reliably on 30, 60 or 90 days? If they do, you
have a good change of qualifying for invoice factoring.
Accounts receivable
factoring is very easy to implement and works as follows:
1. Your company delivers
the goods or services to the client
2. You invoice your client
and send a copy of the invoice to the factoring company
3. The factoring company
advances you between 70% and 90% of the invoice as the first installment
4. Once the invoice is
actually paid, the factoring company advances you the remaining 10% to 30%
as a second installment, less a small fee
Factoring financing is a
great alternative to bank financing and venture capital that is easily
available to small and medium sized businesses.
