Now that you’ve taken into consideration such “traditional” funding chain options as bond insurance, home equity loans and boot strapping, let’s take a step off the beaten track just a little and discuss three more business financing possibilities:
- Invoice Advancement
- Supplier Lines of Credit
Before I go any further, let me explain…in case “factor” is a term with which you are not familiar.
Let me start by stating that a “Factor” is a third party to whom you can sell your accounts receivables (your invoices) at a discount. This third party (Factor) pays you (the seller) for the accounts in advance, with the balance of the purchase price being paid, net the factor’s discount fee (commission) and other charges, upon collection. This is what is meant by Factoring. Factoring companies can be found on the internet.
The big advantage of Factoring for you, the business owner, is that it gives you access to ALL your financial assets, not just the fixed assets that a bank considers for its loans. This provides you some extra flexibility you may not otherwise have.
A word of caution here…this funding option, in the end, is cutting into your profit margin because of the discount you are giving to the Factor who is buying your invoices. Knowing you will be able to carry on with your business even though you are doing this is important.
Invoice Advancement (Discounting) –
This funding option differs from Factoring in that you are actually borrowing cash, using your open invoices (receivables) as collateral. This is also known as “receivables assignment”.
Basically, the business (you) has a lending agreement with a lending institution assigning specific customer accounts that owe money (accounts receivable) to the lending institution. In exchange for these accounts, the borrower (you) receives a cash advance for a percentage of the accounts receivable. You can also expect to pay interest and a service charge.
The advantage and disadvantage for this funding option mirror those of Factoring described above.
Supplier Lines Of Credit –
This “line of credit” is, in actuality, a form of trade credit. Suppliers let companies who buy their goods (i.e. raw materials) obtain them (up to a specified dollar amount) and pay the balance on the account within 30 days without any penalties.
This business funding choice does give you cash flow flexibility, especially if you are in an industry where your invoices are generally a net 30-90 days billing/payment cycle. Sometimes your supplier may offer you discount terms—such as 1 or 2 percent off the total invoice price—if you pay them early.
The supplier credit funding option, though a boon for suppliers, can also be a business risk should customers fail to pay the balance on their accounts.
With this post, we are getting near the end of our “Traditional Funding Choice Chain”. Look for four more very viable, very important business funding options for business start-ups in my next blog post later this week.