In the United States, the factoring of the invoice is often perceived as “the last resort financing option“. In this article, I know that the factoring of the invoice should be the first option for a growing business. Debt financing and equity are options for different circumstances.
Two key inflection points of the business lifecycle
Inflexion Point One: a new business. When a company is under three years old, capital access options are limited. Debt funding sources are looking for historical income figures that show debt service capacity. A new company does not have this story. This makes the risk of very high debt financing and considerably limits the number of sources of debt financing available.
With regard to equity financing, equity investment funds always come for a piece of pie. The youngest, less proven to society, plus the percentage of equity that needs to be sold. The owner of the company must decide the quantity of his society (and thus to control) that they are willing to give up.
The factoring of the invoice, on the other hand, is a transaction based on assets. It is literally the sale of a financial instrument. This instrument is a commercial asset called an invoice. When you sell an asset, you do not borrow money. Therefore, you are not going to debate. The invoice is simply sold to a reduction in the value of the face. This reduction is generally between 2% and 3% of the revenues represented by the invoice. In other words, if you sell $ 1,000,000 bills, the cost of money is 2% to 3%. If you sell invoices of $ 10,000,000, the cost of money is still 2% to 3%.
If the owner of the company first chose the factoring of the invoice, he / she would be able to grow the company to a stable point. This would make much easier to access bank financing. And this would provide greater trading power during the discussion on funding equity.
Point of inflection two: fast growth. When a mature business reaches a rapid growth point, its expenses may exceed its income. This is because customer delivery for the product and / or service comes later than reasons such as payroll and supplier payments must take place. This is a moment when the financial statements of a company can indicate negative figures.
Debt funding sources are extremely hesitant to lend money when a business shows in red ink. The risk is tried too high.
The sources of financing of actions see a company under a lot of stress. They recognize that the owner may be willing to give up additional funds to obtain the necessary funds.
None of these situations are interested in the business owner. The factoring of the invoice would provide much easier access to capital.
There are three primary subscription criteria for the factoring of the invoice.
The company must have a product and / or service that can be delivered and for which an invoice can be generated. (Pre-income companies have no account to receive and therefore nothing that can be taken into account.)
The company’s product and / or service must be sold to another commercial entity or government agency.
The entity to which the product and / or service is sold must have a decent commercial credit. That is, they a) must have a payment history of invoices in due time and b) can not be in default and / or at the edge of the bankruptcy.
Factoring invoices avoids the negative consequences of debt financing and stock financing for young and fast business businesses. It represents an immediate solution to a temporary problem and can, when it is correctly used, quickly bring the company owner to the point of accessing debt financing or equity on its conditions.