 The biggest defiance of a new business is finding the cash needed to get everything up and running, that's why, starting a new business is a frighten task. In this situation factoring can help you, providing major benefits for new and growing small businesses.
Starting a new business, you have to put up some of your own, or a friend's, cash. Because factoring can not help you in this. The difficult task may expect you in case all that doesn't provide enough cash. And this is getting a small business loan from the bank. Once you have done that you inevitably don't have any collateral left over to grow and expand. This is the main reason why small companies almost always end up staying small. But luckily, factoring can provide that big shove to get to the next higher level of business growth.
Let's say you own a fledgling company with 8 employees and $15,000 cash on hand. There is no doubt that cash will probably set aside for payroll and daily operating costs. Cash flow will not cause problems if you sell directly to the general public. Nevertheless, if you sell to other companies and deal with large contracts there is usually a 60 to 90 day protraction before you get paid. There is a possibility you probably will be looking to get new and larger contracts with new clients if everything will be steadfast and beneficial with your company. And when the time you get those big contracts will come, you will find that you have to employ more employees, maintain more on hand inventory for the new client and buy more office equipment to support your expanded staff.
And the new problem is finding the cash for covering these new costs until the big new customer starts paying you. Banks are not helpful in this situation, because most of them require at least a 2 year history of profitability before they will give you a loan to enlarge your business. You haven’t enough time to enlarge. But by selling your accounts receivable to a factoring company you can bridge the cash flow gap that threatens to stifle this growth phase for any new company. Since factoring is based on your companies accounts receivable and not how long you have been in business you can enlarge when your time is right.
Usually a working relationship with a factoring company takes a week to setup, start to finish. Once you approach the factoring company with your situation they get back to you rather quickly with a preliminary proposal. It can happen in less than a day. You will need to provide the factoring company with documentation and information regarding your accounts in case you both agree with the basics of the proposal. The factoring company then goes to work checking the credit of your customers and checking other relevant information. So, you can start getting cash for your accounts receivable almost immediately if everything checks out from their end.
You essentially end up with a revolving credit line with the factoring company based on your accounts receivable. As long as you can keep getting the accounts receivable the factoring company will be able to purchase them and cash will be there for growth and expansion.
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