Invoice funding (sometimes referred to as “invoice factoring” or just “factoring”) can be a potent tool for the early-stage entrepreneur, as it offers quick access to cash that may not be accessible through more traditional financing avenues, such as bank loans, that are available to more established businesses. Additionally, the process for securing financing through factoring can be much more straightforward than the lengthy application and approval process required for a traditional bank loan. Invoice funding can be a savvy move for entrepreneurs for several reasons.
First, most banks that make traditional bank loans are seeking larger clients with a demonstrated history of significant cash flow and, in many cases, assets that can be used as collateral for a loan. Banks may need to see at least an early track record of success before they feel comfortable extending a sizable traditional business loan. Often, entrepreneurs running startups and early-stage businesses do not meet this profile and, though their businesses may represent significant future earnings potential, they do not have sufficient cash flow, assets, or history that would allow them to access more traditional funding sources. Therefore, there is a mismatch between traditional funding sources and entrepreneurs that invoice funding can potentially address.
Second, an entrepreneur may only need access to small amounts of capital for a short period of time to help him or her meet a short-term cash flow need. Examples of these types of needs including meeting payroll obligations, covering start-up costs like purchasing raw materials or equipment, or covering accounts payable costs. For these types of needs, invoice funding might be a better solution than a traditional bank loan because it offers quick and easy access to financing without a long-term engagement or relationship with a lending institution.
Finally, compared to a traditional bank loan, invoice funding offers a relatively quick and hassle-free experience. While a loan may require a lengthy, bureaucratic, and invasive application, waiting, and – hopefully – approval process, engaging a factoring company to handle receivables can be quick and painless. Also, there are often fewer requirements tied to this type of financing than to a traditional bank loan. For example, with factoring, there are no minimum funding amounts (bank loans often carry a minimum loan size); no minimum repayment term (often years with bank loans); no early payment penalties, and no long-term requirements beyond the duration of the factoring service contract.
While invoice funding may not the right financing resource for all situations, it is an important tool for the entrepreneur to consider.
