Financing a Start-up Business Using Factoring

Start-up businesses reviewing financing options should consider how factoring can provide the needed cash to fund critical operations.

What is Factoring
A customer owes money and is given an invoice with terms of thirty to sixty days to pay. The account receivable is then sold and the company gets immediate capital to use for utility payments, rent, payroll, or any other cost it faces.

Business author Kris Koonar writing on Streetdirectory.com describes an advantage for companies using factoring: "typically the factoring firm pays about 70% to 90% of the total face value of your invoices. The factoring company also takes up the responsibility of collection from your customer. The remaining amount is cleared as and when the customer pays the amount. This enables you to concentrate on business development activities."

Factoring in Retail
A company in Southern California, Softline Home Fashions, used factoring to finance its start-up operations. Softline imports quality polyester fabrics and sells to independent retail outlets and mass merchandisers.

"We started with very little cash," co-founder Jason Carr told me. He and his brother Rodney explained how they conserved their initial cash. "Some guy would have a stock lot and we'd go and re-sell it to generate capital. We started taking trips to China to buy more of a regular running line and we used factoring."

Carr mentioned he and Rodney worked hard to establish good relationships not only with customers but they developed a trust relationship with suppliers who "allowed us to have flexible financing arrangements."

Caution with Factoring
Factoring can provide access to cash usually in less than two weeks. A growing business that has more accounts receivable coming in can then start generating its operating cash flow.

But there are dangers in factoring that a business should know, according to advice on the website Investopedia. "Deal only with well-known, reputable factors. Although it may be convenient, it is inadvisable to factor too many of your accounts receivable as it is expensive and may get in the way of establishing a track record with conventional lenders."

Steps before Factoring
A start-up company needs to plan carefully before investing money, seeking loans, or engaging in financing arrangements that increase pressure on the operation.

Identify the business offering: this sounds basic but identify the customer and why they should purchase. Interview potential customers to get their perspective on the product or service.

Research the market: know the marketplace thoroughly, and know competitors, before tying up capital or making financial arrangements that could lead to personal debt.

Have initial satisfied customers: use financing plans like factoring after there are already satisfied customers giving positive feedback.

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