Hello, this is Hall T. Martin with the Startup Funding Espresso — your daily shot of startup funding and investing.
Equity funding is just one source of funding for your startup. There are many others such as factoring.
Factoring is selling your accounts receivables to a finance company at a discounted rate.
It’s not a loan, so you are not taking on debt but rather selling your invoices for cash, albeit at a discount.
A typical factoring arrangement gives the business 85% of the value of the invoices and keeps 15%.
The factoring company often charges a processing fee and a fee for however many days it takes the customer to pay the invoice.
These two costs add up to be the discount the business is paying for the receipt of cash.
Factoring works well for the company as it comes with long payment terms.
Businesses with a cash-flow shortage often use factoring as it’s a fast way to access capital without taking on debt.
The factoring company will look at the credit history of the customer paying the invoice, rather than the startup providing the product.
The cost is giving up a portion of the profits which makes fast cash expensive.
Your customers will know you are factoring, as the invoice will be retitled into the name of the factoring company.
Slow-paying customers will become more expensive as the cost of collecting their payment will take longer.
Factoring works best for short-term cash-flow management when you have predictable payments from customers that take some time.
Thank you for joining us for the Startup Funding Espresso where we help startups and investors connect for funding.
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Hall T Martin is the director of Investor Connect, which is a 501(c)(3) nonprofit dedicated to the education of investors for early-stage funding. All opinions expressed by Hall and podcast guests are solely their own opinions and do not reflect the opinion of Investor Connect. This podcast is for informational purposes only and should not be relied upon for the basis of investment decisions.