The first couple of years are crucial after a company has launched. Realistically, this is the period of time where unexpected expenses are common, and it can be difficult to maintain healthy profit margins. Many startup companies find that factoring receivables is a worthy way to get the funds they need without being burdened for years while trying to pay back long-term loans.
This is a Short-Term Solution
The factor process works differently than traditional loans because it offers cash advances in exchange for a startup company’s unpaid invoices. After turning those invoices over to a factoring company, you can often get the funds you need in just a few days.
Many startups find themselves in tricky situations because they need to buy things that will aid in the growth and overall prosperity of a business, but don’t want to go through a lengthy loan approval process. In this case, factoring receivables is a worthwhile possibility.
No Need for a Credit Check
Startup companies often run into problems when lending companies require credit history checks. A new business often doesn’t have a sufficient history built up. In some cases, that means the business owner has to offer his or her personal assets as collateral.
In a factoring situation however, the unpaid invoices act as the collateral. A credit check never occurs.
When factoring receivables, the company that’s offering the funding will most likely want a company’s newest invoices. That’s because those have the highest likelihood of getting paid, and the lowest amount of risk associated with them. Instead of looking at a credit check to gauge the risk of lending money, the company uses the invoices to verify a business has a solid, active customer base.
Startups Can Make Plans When Using This Method
If a startup company is solely relying on profits from invoices, it can be extremely difficult to look ahead to the future and start working on plans. So much is dependent on if and when a customer pays that it can feel like nothing is certain.
Factoring receivables may allow those companies to adopt long-range viewpoints, knowing they can depend on the cash that comes from those unpaid invoices. That can allow for preparations to be made in regards to things like company expansions, hiring new employees or getting new equipment.
It should now be clear why so many companies that are just beginning end up turning to their outstanding invoices and converting them into a way to get cash. If you feel like your business is being hampered by a lack of funds, this possibility might assist you too.