Startup businesses can benefit from invoice factoring, a solution that allows the financing of slow-paying outstanding invoices from creditworthy customers. Factoring companies don’t provide a line of credit or loan to borrowers, but, rather, pay the invoiced amount and, then, collect payment directly from their customers.
Invoice factoring is always a great option to finance a business, as long as the business is earning decent profits and not at risk of bankruptcy, and the owner isn’t facing any legal issues. Most of all, there’s no equity or collateral involved, which makes it favorable for startup entrepreneurs.
So, how can you finance your startup business with invoice factoring or receivable factoring? Here’s a step-by-step guide:
Step One : Check Your Eligibility
Invoice factoring is an easy way to get funding. It eliminates the waiting period to get paid by your customers. Also, you’ll be able to offer flexible payment terms to your customers, which is good for your business reputation.
However, third-party factoring companies don’t buy any invoice just like that. There are certain requirements they need to ensure before they enter into an agreement with you. So, you need to check your eligibility to determine if factoring is ideal to finance your startup business.
The three things factoring companies check when buying receivables include the following:
- Successful delivery of the product or service
- Commercial clients or customers have good credit
- Invoice isn’t restricted by liens (claim or used as collateral)
Step Two : Choose The Right Factoring Company For You
In receivables factoring, the factoring company purchases your accounts receivable. Before you can fund your startup business through factoring, you first need to find a reputable company. And, how do you know if a company is legitimate and reliable?
Here are the important things to look for in an invoice factoring company:
- Fees and penalties : Many factoring companies offer low factoring fees, but with hidden additional fees. Some of the fees you need to check aside from the advance percentage include factoring fees (3% to 8%), processing fees, and application or setup fees.
- Value-added services : The factoring service is the primary service that factoring companies offer. However, you also need to check their additional services that can add value to your experience, such as credit and background services (current and potential customers), collection online account reporting, customer service, and invoice management.
- Experience : Work with an established factoring company that specializes in the type of business or industry you belong to. This way, you have peace of mind that the company you’re dealing with understands how the cash flow works in your niche or business.
Step Three : Set Up An Account And Submit Documents
Once you’ve found a reputable factoring company, it’s time to set up your account, which takes around five to seven days. Each company has a different application process. In general, you’ll be asked to submit the following:
- Your factoring invoice application
- A sample invoice
- A list of clients you want to finance
- Your accounts receivable aging report
Step Four : Start To Fund Invoices
You’re ready to fund invoices once your factoring account is set up. The funding process is a very quick process, usually within a business day, once the factor’s criteria are met.
Here’s how invoices are funded:
- Installment payments : Invoices are typically funded in two installment payments. For the first installment or the advance, it covers 80% to 85% of the amount of the invoice, deposited directly to the bank account of the business owner. The 15% to 20% is paid once your customer pays the invoice. There’s a small charge when you use a factoring service, which is usually deducted from the second installment balance after your customer pays.
- Grow Your Working Capital : The more invoices you factor in, the higher the amount of money you can use to finance your business. It means that you can exponentially grow turnover and grow your business as long as your business is generating more creditworthy customers.
- Credit Control : Another benefit of factoring your invoice is helping in credit control. You’ll have a working capital you can use to finance your daily business operations. You can choose the invoices you want funding for, especially if you have irregular sales.
Upon passing the factoring company’s screening and the required documents, you’ll reap tremendous benefits for your startup business. Grow your working capital to sustain your day-to-day business funding needs as you increase your invoices being factored. Eventually, you’ll be able to expand and have a more established business.
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