Startups Invoice Factoring – Your ability to grow your access to cash
With little or no tangible assets Startups, have hard time being approved for a bank loan or banks are not willing to extend credit. Traditionally banks will not consider loaning to Startups who have been in business for fewer than 3 years because of the high failure rate. If a business does receive a bank loan, this adds another payment to the company’s expense column, which further cramps cash flow, rather than freeing it up for growth and expansion. However, there are Invoice Factoring company, such as CBAC Funding, handle your invoice – including the remaining balance.
Invoice factoring, though, works differently. With factoring, a business is not taking on any new debt. Instead, with factoring, a company receives funds based upon its outstanding account receivables; in other words, your company can obtain funds for work that you have completed but, for which you have not yet received payment.
Here’s an illustration for you:
Here’s an example. If ABC Company bills XYZ company $100,000. Instead of waiting for XYZ Company to pay the invoice, ABC can factor the invoice and receive about $80,000 today and when XYZ finally pays the invoice ABC will receive the remaining balance, minus the factoring companies fee, usually 3% or so. Perfect! That is exactly the type of situation where invoice financing is the ideal solution.
What is invoice factoring and how is it different from traditional bank financing?
1) Bank Financing: Prefers to loan to companies with significant tangible or hard assets, such as real estate and machinery; Invoice Factoring: Does not base lending on tangible assets; the factor lends against the value of your receivables
2) Bank Financing: Loans or lines of credit are fixed and require additional collateral and/or substantial documentation to increase the limit; Invoice Factoring: Your ability to grow your access to cash is based upon your accounts receivable; if you take on a large new client with good credit, the accounts receivable generated are available to meet your cash needs
3) Bank Financing: May insist on insurance policy on your assets w/ the bank named as beneficiary; Invoice Factoring: Never requires insurance policy for traditional accounts receivable
4) Bank Financing: Generally aren’t risk tolerant ; Invoice Factoring: More risk tolerant