It takes an investment to start a business when things such as equipment, insurance, and office supplies are needed to even open the doors. One of the challenges many start-up companies face is obtaining enough working capital to get off the ground running.
One way many start-ups fund their business is through invoice factoring. Invoice factoring, also known as accounts receivable financing, is a debt-free financing solution that unlocks working capital that is normally tied up in receivables.
How Does Invoice Factoring Work?
Many people wonder how does factoring work? It is a fairly simple process that gives your business access to capital so that you can operate and grow without adding additional debt.
- The first step is to choose a credible factoring company that has experience in your industry and has the ability to meet the demands of your business.
- Once you’ve selected a factoring company and signed an agreement, the next step is to setup your account. During this process, you’ll select which of your clients you want to factor.
- After you’re set up, you’ll send your invoices to the factoring company. You’re advanced a percentage of the invoice total. Although this percentage varies by factor, typically it is between 70 and 90 percent. Some of the variables that determine the advance rate may include, the volume of your invoices, your industry, and your customers’ credit history.
- Next, the factoring company sends the invoices to your customers. Your customer processes the invoice as normal and sends payment to the factoring company.
- Finally, when your customer pays the invoice at their agreed upon terms, the remaining percentage of the invoice is paid to you, minus a factoring fee.
Why Does Invoice Factoring Work for Start-Up Companies?
Credit
Approval for invoice factoring is based on your customers’ credit rather than yours. So even if you have little credit history, no credit or less-than-perfect credit, you can still be approved.
Limits
Obtaining a bank loan or a line of credit can be a challenge for businesses with little or no financial history. Even if you are approved, the amount might not be sufficient to fund daily operating expenses and meet payroll obligations. If you choose a factoring company that will grow with you, it is easy to obtain more capital. For many factoring companies, the more that you invoice, the more cash you’ll receive.
Time
As a start-up company, you don’t have time to wait to get your business going. It can take weeks or even months to get financing through a bank when you go through the application and approval process. With invoice factoring, the setup can be done in just a few days and funding can be done within 24 hours.
More Available Cash
With invoice factoring, start-up companies have access to more available cash giving them the opportunity to take on new opportunities for growth. The table below illustrates how invoice factoring can increase your bottom line.
About the Author: TCI Business Capital
Since 1994, TCI Business Capital has provided accounts receivable financing and invoice factoring services to companies throughout North America. Our easy-to-setup factoring lines allow our customers to access the capital that is tied up in their accounts receivables. Our factoring programs range from $50,000 to $20 million per month, giving every business the ability to grow.
If you’d like more information about our services, email info@tcicapital.com or call 800-707-4845.