Start-ups and small businesses have traditionally had difficulty raising capital through outside sources and, for new companies, the chances of getting a bank loan is close to zero. Most banks today won’t even consider lines of credit or loans for companies that have been in business less than 3-5 years. Start-ups haven’t built up adequate credit history and banks are just not willing to give money to companies with no credit history. Without adequate money coming in, it is difficult for a small business to maintain payroll and pay its bills. No wonder we keep reading the statistic that 85 percent of business start-ups fail in the first five years. Some research has indicated the reasons for these failures are a lack of funding and poor planning. These facts combined with today’s economy makes small business financing more important than ever. Well, there are ways for small businesses to avoid funding issues and find alternatives for obtaining business financing. One method is receivables financing, also known as receivables factoring, invoice factoring, invoice discounting or debtor financing. Receivables financing enables small businesses to obtain the cash necessary to keep the company running by getting the money they need without having to go to a bank for a loan or take on additional debt. What they can do instead is sell their receivables at a discounted rate to a factoring company. Factoring companies pay cash for the invoices and handle the collection process. A factoring company usually pays 70 percent to 90 percent of the total invoices. Then, after collecting the invoices, the factoring company returns them to the small business owner. For this service the small business will pay a fee of 1.5 percent to 3.5 percent of the total invoices. As you can see, factoring differs from a loan in that invoices are being sold to the factoring company and not being offered as collateral. The small business or start-up is then able to convert its invoices into operating cash and not have to wait 30, 60, 90 days or more to receive payment. There are numerous benefits to factoring for any business, but especially for a small business or start-up. Receivables factoring will shorten the collections process giving a small business the cash flow they need without taking on new debt. Factoring can also be a great option for a small business or start-up that has been attempting to obtain a loan and is having trouble qualifying with a bank. Many small businesses that are in a start-up situation will find it difficult to receive a bank loan making factoring services essential if they want to maintain an adequate cash flow. Most small businesses don't have a collections department or adequate personnel and working with a factoring company provides this much needed service. Factoring provides them with the required cash flow to survive and enables the business owner to focus on the day-to-day operations. Receivables financing, receivables factoring or invoice factoring places the time, cost, and effort of collection into the hands of a factoring company. This enables the business’ staff to concentrate on what they were hired to do and not worry about how to sustain the business financially.
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