Entrepreneurs Use Factoring to run Their New Business

Raising funds for a small business traditionally has been done via writing a business plan. Then you can raise the funds and execute the business plan.

Today's tight economy has created a situation with credit constraints at mainstream banks, so many entrepreneurs are scrambling to find new solutions such as factoring invoices once their business is up and running.

In some cases, entrepreneurs can pull together cash from family and friends, then go ahead and start their small business. The problem is that raising funds can take more time than you think, so think about first bootstrapping, and bringing in some cash Plus, you'll raise money faster and easier after bootstrapping. Most investors like investing in a business that's generating a lot of revenue and hasn't raised any money from investors.

It is important to prepare yourself to give up some ownership in your company if you get investors, so the longer you can avoid raising the capital from others, the bigger the piece of the pie you'll get. However, once the business is up and running, in order not to run into the problem of a cash flow crisis, factoring invoices has become a popular strategic maneuver. You don't want to ever take funds from an angel investor if you don't know you can multiply the money. What's more, raising funds from investors is often faster after you have revenues because they like the idea of investing in a business that's already generating revenue.

It's also important to watch the bottom line on these types of expenses. And expenses must be kept low. The reality is that many necessities for a new business are in actuality, luxuries. These good habits often stay with the business owner long after the business is making money.

It's also a good idea to make sure that resources are not wasted. Hire good passionate people who really believe in the business, and hire them based on their skills not price. Often cheap labor ends up costing more in the long run.

In the meantime, factoring is not a loan - it is the purchase of financial assets, or receivables, and it differs from traditional bank loans in that bank loans involve two parties, while factoring involves three parties. A bank basees their decision on a company's credit worthiness, whereas factoring is based on the value of the accounts receivables. Also known as factoring accounts receivables, once a factor has approved the debtor, invoice factoring benefits businesses that do not get paid for 30 to 60 or 90 days. The due diligence efforts usually take a day or two, then factor advances up to 90 percent against the invoices. Turnaround is less than 48 hours. What's more, there are many companies who don't expect to buy 100 percent of a company's receivables.

In the end, if cash flow for your small business is still lean, then by factoring invoices, it will be easier to stay on track when monthly bills come due. After all, factoring has been around for more than 4,000 years.


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Kristin Gabriel works with The Interface Financial Group (IFG), North America's largest alternative funding source for small business. (www.ifgnetwork.com) The company provides short-term financial resources including factoring invoices, serving clients in more than 30 industries in the United States, Canada, Australia and New Zealand. IFG offers expertise in factoring, accounting, finance, law, marketing and banking