Startups love to land a big signature client. A “Whale” of an account like Amazon, Walmart, or Johnson & Johnson. These types of brand name customers immediately establish credibility for your new business and greatly improve the ability to grow fast. But what happens when that large customer demands to pay on Net 60 or Net 90 payment terms? Sure, you can use their logo for a PowerPoint slide, or the customer page on the website, but when it comes to their actual check deposited in the bank… you’re still waiting. Being tight on cash isn’t always a sign of having weak sales numbers. A lot of times startups are caught in this stressful position as a cost of doing business with the biggest companies. The most common reaction startups have to this cash flow problem is looking to the next round of VC funding. They set up meetings. Fly around the country. Show off the deck with the updated customer slide. The result, if successful: A cash infusion to fund the next few months/year of employee salaries, marketing, product development. The cost of this option: Equity getting diluted for the founder/founding team. It’s not uncommon to see original founders own less than 10% of their company after these first few years of fundraising. At that point, it feels less like ownership and more like being an employee with good stock options. A less common option, or at least less common until recently, is for startups to use AR financing (specifically invoice factoring) as a growth mechanism. Invoice factoring - an alternative financing option most common in industries like manufacturing, trucking, and staffing - offers an alternative way to solve the immediate cash flow problems created when working with large customers. Is it a better option than VC funding? In some ways, yes. It depends on the situation. But here are three universal reasons why tech startups should consider invoice factoring.
Let’s say you’re a startup in Michigan. You have a few VCs and angel investors in-state, but the big name ones are out on the coasts. This time away from your office means you can’t be working on your actual day-to-day business matters. Compare this to invoice factoring. With a tech-enabled invoice factoring solution, the entire submission process can be done online. You don’t have to leave the office at all. Or your living room.
To piggyback on the last point, invoice factoring can go as fast as 24-48 hours. Not only is this faster than all the travel or review time of a VC raise (especially if you include the time it takes to build your deck) but compare this with the amount of time it takes to get a loan from the bank. Banks are difficult to receive any funding from as a new tech startup and, if you do, it’s definitely not a 1–2-day process.
Equity is a tricky one to measure because it’s not felt -- at least financially -- in the short-term. You’re left wondering is that 10% I gave up one day going to be $100,000? A million dollars? $50 million? And so, there’s a common expression in this decision-making process: 100 percent of zero is still zero. Meaning you don’t want to aggressively hoard equity if the result is the business running out of money. But here’s a different perspective to consider. Take the money aspect out of all of this. No need to guess how much the 10% will be worth in 10 years. Instead, it’s important to ask things like: What does it look like to no longer have a majority say in decisions? To have weekly or monthly meetings with all of the investors. To constantly be presenting to shareholders, here’s what I want to do next vs. being able to call your own shots. There’s a strain to the investment side and the downside is it can feel less and less like your own business. With invoice factoring, this isn’t an issue. You maintain all of your ownership and working with a company, we’re there to help you grow. No flights, reports, weekly/monthly meetings required. Keep running your business your way. We’re here to help you grow.