New Business Challenges – Obtaining Commercial Financing

Posted by Gil Oliva on Fri, Oct 24, 2014 @ 08:00 AM

Obtaining a loan from the bank when your business is starting out, and not yet profitable is more than likely going to be a challenge. So how do you get the money you need to meet your initial costs?

Business_challenges_blogMany businesses turn to invoice factoring as an answer. This is how it works: 

  • A business sells outstanding invoices or accounts receivable to a company, known as a factor that specializes in collecting payment on the invoices.
  • The factor advances most of the invoiced amount, usually 70% to 90%, to the business after checking out the credit-worthiness of their customer.
  • Once the bill is paid in full, the factor remits the balance to the client, minus a transaction, or factoring, fee.

The beauty of this type of commercial financing is that payment can be received in as little as 24 hours once the initial contract is in place.  Other benefits include: 

  • Less paperwork than a traditional bank loan
  • Simple qualification process
  • No increase in debt burden
  • In-house A/R department 

The reason that factoring works so well for new businesses is that it is not the profitability, or creditworthiness of the company needing the money, it is the financial soundness of their customers that matters. So if you are starting out, and have a healthy amount of accounts receivable, you will more than likely qualify for this type of financing where a bank would turn you down. 

Some new businesses may consider the venture capital route, but this involves giving up equity in part of the company, and many companies may not like that idea. It pays to consider what grants are available also. Invoice factoring may cost more, but can certainly help see a new company through the critical start up period. Some companies may choose to factor while they are looking for other forms of financing, and some may continue to factor their invoices as the process is simple and receipt of funds is quick.

Invoice factoring may not be the cheapest form of financing, but a reliable company, such at Bay View Funding, provides so much more than cash advances on invoices. This form of commercial financing partner is there to discuss the best options for your company, and to provide many extra services that are included in the cost of factoring. They are available to answer questions and concerns, and advise on the best strategies. They also provide credit checks and are a built in A/R department which takes the worry out of receiving payment from your customers. This is a huge plus when you are just starting out, reducing the cost of having staff to perform these duties in-house. 

Banks certainly used to be more flexible when working with their customers, but rules, regulations and constraints mean that a plethora of paperwork needs to be filled out each time your company wants to obtain, or increase a loan. With factoring, once you have qualified to factor each customer there is no need to fill out paperwork the next time you wish to factor, you just submit more invoices.

Learn more about Accounts Receivable Financing

Topics: Factoring Accounts Receivable, Commercial Financing, About Invoice Factoring

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