Starting up a new business is both exciting and stressful. You found your niche, you’ve done your market research and happy you have a sound commercial proposition, you have taken that great leap of faith and are doing it your way.
Doing it your way though, unless you have saved a nest egg or won the lottery, may mean you don’t have a safety net. You may have the funds to get going but can you keep going?
You are building your client base, you are busy and orders are coming in but the cash flow isn’t as it should be. According to your invoices it has been a good month but there isn’t enough money in the bank to pay for wages and the other regular expenditure, let alone the unforeseen costs.
If your customers are mainly commercial organisations they may well be in a similar situation to your business and will look to extend payment on invoices as long as they can. Large organisations generally work on more than thirty days turnaround and if they are a significant customer you will only push so hard to get payment.
One option is to offer a discount for timely payment of invoices but once you set this expectation it is hard to take that offer away. Besides, if you have provided the goods or service before time or on time, did the customer offer you a bonus? Probably not, so try not to go down the discount path.
Banks are notoriously bad in providing loans for start-ups. First they require financials for the past two years (there are some exceptions) and you may not have been in business that long, a credit history and you may not have the required level of assets.
Then there is crowd funding or angel financing or venture capital. The first two only work for a chosen few. Venture capital is also hard to get and you may not retain control of your company, which is not desirable given you have only recently gone into business.
Where to now?
Factoring or cash flow debtor finance is a viable option.
Factoring is “start-up” friendly, while the Factor will do their homework when an application is made, it is the strength which is a significant issue.
Once approved, it is far less onerous than a bank, funds will be deposited based on the total amount of the invoices presented. Approval can be made within days, rather than weeks. Payment terms are determined depending on your business situation and are flexible, unlike a bank, so if your sales improve and invoices are paid regularly then terms can be renegotiated.
Not only do you have funds deposited in a timely fashion, factoring also significantly reduces your bad debt, something which is desirable for a bank should you seek finance from one in the future. You will also save time when you don’t have to continually chase debtors for payment. Just remember the Factor is not a debt collection agency.
Don’t be put off thinking Factoring is expensive, used effectively it is paid for by your increase in sales, which you are able to achieve because of the confidence you now have in growing your business.