Factoring Blog - For Small Businesses

This article from the U.K. suggests factoring can be used by startups to avoid giving away equity to angels or VCs:

In the last few years more people than ever are leaving the safety of their careers for the excitement and challenge of being their own boss.

However many start-up businesses are keen to get an investor on board in order to get the capital they need to grow, when in fact they may easily be able to secure another form of finance that is less costly, in terms of both cash-flow and equity.

Before deciding to give away any amount of equity in your fledgling business, it is wise to explore all the other financial routes thoroughly. Whatever type of finance you go for should be considered against how you intend to use the money.

If your problems stem from being unable to pay for such things as suppliers, overheads or staff, then there are a few finance options that will solve cash flow issues. These types of finance are also used by many businesses for facilitating growth; management buy-outs; management buy-ins; and other activities that require a fast and large cash injection.

While I would agree with the benefits of factoring as outlined, I think the use of the terms “fledgling” and “startup” need to be defined or they could be misleading.

The question is, does the word “startup” mean a brand spanking new company, birthed last month?  Or does it mean a young company but one with some traction.

A lot of raw startups — one year and under — simply don’t have enough revenue coming in to make factoring viable. If you’re just 3 months in business, struggling to make sales (as many newborn businesses are), and have limited invoices, then factoring may be premature for you. 

On the other hand, if you use the startup term in a broad sense to mean a young business but one with some time under its belt, established customers, good billings but a need for cash flow, then I can see factoring making sense.

This entry was posted on Sunday, February 10th, 2008 at 2:30 am and is filed under Factoring. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.