Factoring for start-ups

There are several types of business in the UK – but one thing every business has in common is a starting point.
You need cash to start a business. There’s a lot to do and one essential job is finding the right source of business finance. You might have a leading commercial idea but without this immediate injection of funds, your new business will most likely not go anywhere.
Nonetheless, thousands of entrepreneurs do find the money to start a business. How do they find these funds? How do they get started?

Start-up Finance options
The most immediate form of start-up finance is capital provided by the business owner(s). Before pouring out your life savings into your new business, it’s important to fully understand what you are doing as every business is not guaranteed success.
However, there are several types of business loans available for new starts. A bank loan or overdraft may be used to provide short-term working capital. Bear in mind that banks often require security and evidence of trading results before lending out to businesses. In addition, asset finance, through hire purchase and finance leasing, can be used for the acquisition of fixed assets such as machinery and property.
Further capital can be obtained by approaching a business angel. Borrowing money from friends and family can do you some good in the interim. The good news is you could receive all the funds you need at very low costs. However, this form of financing could require you to give up some control of your business – resulting in a smaller share of future profits.
Factoring – financing facility for start-ups
Factoring can provide essential finance early on in a business’ life. Factoring is a form of cashflow funding that allows you to release cash from outstanding invoices as soon as they’re raised. The funds released could be up to 90% of the cash tied up in your business’ sales ledger, with the funds made available to you usually within 24 hours. The remaining 10% of the funds would be paid to you once your customer settles their invoice, less any charges.
One of the greatest difficulties faced by start-up business is cashflow gaps created by late-paying customers. Most businesses tend to operate on credit terms of up to 90 days which unfortunately puts a strain on a new company. Factoring creates a strong cashflow that enables a new business cover its start-up costs.
Citing a manufacturing firm as an example, the funds advanced by the factor can be used to pay for raw materials against its next order. On the other hand, the funds advanced to a start-up recruitment firm could be used to invest in expenses such as advertising for job vacancies.
The Benefits of Start up Businesses Factoring
Working Capital
Take advantage of high cash advances of up to 90%, against the value of your sales ledger, usually within 24 hours. You no longer have to wait 60-90 days to get paid by your customers.
The funds advanced provide additional working capital to businesses. In working capital we mean adequate cashflow to cover payroll, operating costs, make initial payments to suppliers or to reduce existing debt. This allows your business to continue to grow without the fear of over-trading.
Early supplier discounts
Funds advanced through factoring create opportunities to save money. Most start-ups are plagued by cashflow challenges and need to ensure that every penny is well spent and every potential discount needs to be utilised. Factoring boosts your bargaining power and enables your business to benefit from early supplier discounts.
Flexibility
Factoring grows in line with your business. This means that as your business’ turnover rises, you could have access to more funding. There’s no need to increase your credit limit with other facilities.
Factoring is flexible in the sense that you have better access to/ control over your finances. Once you stay within the funding limit, you can choose to borrow as much or as little as you want.
Credit Management
Factoring is not just a ‘funding-only’ facility but also has a service element attached to it where the factoring company handles the credit management on your behalf. This involves full administration of your sales ledger which eliminates the burden of chasing customers and collecting payments. By outsourcing the credit control management, cash can be collected in a timelier manner, thus reducing the pressure on your start-up demands. This allows you to concentrate on starting your business.
Bad Debt Protection
If required, factoring could offer bad debt protection. This is by means of a non-recourse facility where the factoring company bears the risks associated with your customers defaulting. You are protected against bad debt that might otherwise have to be written off as an expense to your business. This is a major comfort to start-ups looking for expansion as they are relieved of the uncertainties about late (and overdue) customer payments.