Thousands of businesses open every day. A good number of those businesses will be shut down within a few months. The main culprit for many of these failed start-ups is lack of working capital. If your company is just getting started and facing a working capital crunch, factoring may be the solution you are looking for.
What Factoring Can Do for a Start-up
There are a number of scenarios where factoring will help a start-up get through the cash crunch and get to a steady state of cash flow. If any of these situations sound familiar, you should start looking into factoring as an option for working capital:
- Your business is just too new to go for conventional lending opportunities such as small business loans or bank loans. Most lenders won't talk to you until you have been in business at least a couple of years.
- You have a number of business customers with good credit ratings and payment histories. Your product or service is needed and you have started building a solid client base. You just need working capital to expand.
- You have a long sales cycle, with payment terms of 30 to 90 days. Unless you are a retail establishment with immediate sales, it is likely you have a portfolio of outstanding accounts receivable. And those unpaid invoices means tied up working capital.
- You have slow paying customers who have tied up too much working capital into their unpaid invoices. Some of your best customers may also be the slowest ones to pay. You need the cash that those invoices represent.
- You want to take on a big order, but cannot because you don't have the capital to pay for raw materials, extra salaries, or new inventory. Not taking the order may mean a damaged or disappearing business relationship.
- You don't want to add additional debt to your company. You may have an outstanding business loan or owe your parents a ton of money for helping you get started. You don't need additional debt on top of everything else.
What Factoring Cannot Do for a Start-up
Factoring cannot help all start-up companies. It only works if a business already has accounts receivable. If your start-up does not have enough working capital to get those first invoices generated, factoring is not going to be a viable option for your company.
Alternatives are still available. Once you have a viable purchase order from a well-established company, purchase order financing might be an option. A microlender might be able to get you the first bit of working capital you need. If you have another business, with a portfolio of existing accounts receivable, you could factor those invoices and use the proceeds to finance the start-up.
Don't let a cash crunch bring your business to its knees. There are alternatives available that will allow you to get the working capital you need to get your business off the ground and keep you going.