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Why Invoice Factoring Should Be the First Option for Business Financing

Why Invoice Factoring Should Be the First Option for Business Financing
"""Invoice factoring is frequently seen as the ""financial option of last resort"" in the United States. In this post, I argue that invoice factoring ought to be a developing company's first choice. There are choices for debt and equity financing depending on the situation.

There are two major turning points in the business life cycle.

One of the Inflection Points: A New Company. Options for gaining access to funding are constrained for businesses that are under three years old. Sources of debt financing look for past revenue figures that demonstrate the ability to pay back the debt. A new company lacks that background. As a result, there are many fewer sources of debt funding accessible and the risk associated with debt financing is very high.

As for equity finance, money from equity investments nearly invariably exchange hands for a share of the profits. The bigger the percentage of equity that may need to be sold off, the younger and less established the company. The business owner must choose how much ownership (and thus control) of their enterprise they are ready to cede.

Contrarily, an asset-based transaction is invoice factoring. The sale of a financial instrument is exactly what it is. An invoice is a type of commercial asset used for that purpose. Selling an asset does not constitute borrowing money. As a result, you avoid incurring debt. The invoice is merely sold for less than it is worth. The typical range for this discount is between 2% and 3% of the invoiced revenue. In other words, the cost of money is 2% to 3% if you sell $1,000,000 in invoices. The cost of money is still 2% to 3% even if you sell $10,000,000 worth of invoices.

The business owner could develop the enterprise to a point of stability if they decided on invoice factoring first. That would greatly simplify getting bank financing. Additionally, it would give them more clout in negotiations over equity financing.

Second Inflection Point: Quick Growth When a mature company experiences significant growth, its expenses may exceed its income. This is so that things like wages and supplier payments can be made before the customer pays for the goods or service. Financial statements for a corporation may now contain negative values at this time.

When a company's finances are in the red, debt financing providers are quite reluctant to lend money. The risk is regarded as too great.

Equity financing sources observe a stressed-out corporation. They understand that in order to obtain the required finances, the owner could be willing to forfeit greater equity.

In neither of these scenarios is the business owner benefited. Access to capital would be made considerably simpler through invoice factoring.

For invoice factoring, there are three main underwriting requirements.

A product or service that can be delivered and for which an invoice can be created is required for the business. (Pre-revenue enterprises lack the ability to factor since they lack Accounts Receivable.)

A government organization or another business must purchase the company's good or services.

The organization to whom the good or service is sold ought to have respectable business credit. In other words, businesses must a) have a track record of paying invoices on time, and b) cannot be in default or on the verge of bankruptcy.

Summary

For new and fast expanding firms, invoice factoring mitigates the drawbacks of debt and equity funding. It offers an instant fix for a short-term need and, when used appropriately, can quickly get the business owner to the point where he or she can access debt or equity financing on their terms.

That is a lot cozier location to be."""
 

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"Why Invoice Factoring Should Be the First Option for Business Financing" was written by Mary under the Business category. It has been read 41 times and generated 0 comments. The article was created on and updated on 17 November 2022.
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