Invoice factoring has been around for thousands of years, with its origins stretching all the way back to the Roman Empire. While certain industries are familiar with invoice factoring as part of their business models (like transportation, trucking, manufacturing), most CEOs aren’t aware that factoring is a viable funding option. Today we’ll explore five reasons why invoice factoring might make sense for your business.
1. You’re Not Giving Up Equity
Especially in the start-up world, there’s always an emphasis on equity rounds of financing: Angel investors, VC, and private equity are all focused on taking a percentage of the business in exchange for capital. While it makes sense to bring in investors, it also makes sense to hold on to as much of your equity as possible. In all of these cases, you’re sacrificing future money, and control of your business. It’s not uncommon for the founders of a company to each start with 50% of the shares and over time have it whittled down to 4-5% ownership after all of the fundraising rounds and allocating shares for new partners and early-stage employees. Factoring doesn’t require any more slicing of the equity pie.
2. You’re Not Taking On Debt
Take out a loan for $50,000 from the bank, pay back $55,000 (or more). Go with an alternative lender and the interest could be much higher. Same thing with a credit card. With invoice factoring, you take a newly issued invoice for $50,000, and you’re selling it to the factoring company for money today minus their fee (for the sake of this example, let’s say 2% monthly). You’re losing the $1,000 difference but you are getting the cash today instead of in 30 days from now.
3. You Don’t Have To Chase Down Payment (If You Don’t Want To)
You can set it up where the factoring company is doing the outreach to the customer. Ideally, you want to find a factoring company who works with you as a growth partner. The reason being, a growth partner will treat your customer the same way you would with friendly, professional outreach. A good factoring company improves the customer experience and relationship. They have the incentive to help you thrive and aide your growth. If the factoring company you’re using provides subpar customer service, you can always fire them and pick someone else. Hey, we would be more than happy to chat...
4. Easy To Set Up (Well, With Us It Is)
We mapped out the simple and straightforward process of onboarding. “Start with a simple online application, and connect us with your accounting system to select the invoices you want funded. Get approved and we will propose terms. Review and sign the agreement and we will send you the funds. No personal guarantees or hoops to jump through, super simple. ”It makes the decision quickly and doesn’t come with fine-print surprises. “It’s a solid solution for companies to get their money right away as opposed to waiting 30 days, 60 days, and 90 days. It’s all so that they can grow.”
5. A Nice Alternative For Pre-Bankable Companies
Another thing that holds true all the way back to the Roman Empire: Banks don’t move fast. They are unable to move and the current speed of business, and there’s no sign of them having the appetite for process improvement anytime soon. Banks also avoid anything they see as potentially risky. To a bank, an early-stage company is viewed as very risky. They feel much more comfortable seeing three, five, ten years of earning statements when making a loan. A factoring company sees your outstanding invoice for GE or Procter & Gamble, or a smaller but established brand and they don’t see a lot of risk to that. It makes sense. Those established companies aren’t going out of business, they’re going to pay the bill, but they’re just going to pay it on their terms and at the end of the net terms they negotiated. Factoring companies provide faster cash flow and a level of flexibility + speed that you don’t normally find with banks.