Financing a Startup Business with Accounts Receivable Factoring

Finance your startup business with accounts receivable factoringOften times for a new startup business, it can be difficult to obtain financing. SBA loans are usually out of the question as banks will want to see a track record and will require collateral that a startup business most likely wouldn’t have. Venture capital is an option, but is usually reserved for tech companies that have a huge potential for growth, plus often times it requires you to give up ownership of your business. However, accounts receivable factoring is a great way for a startup to finance their business without having to give up any ownership or taking on new debt.

What is Accounts Receivable Factoring?

Accounts receivable factoring is a type of financing where you sell your receivables to a factoring company for a discount. For startups the main benefit is that you get funded the same day you invoice your customers rather than having to wait 30 days or longer for them to pay you for goods or services that you have already provided them. As a result you have healthy cash flow so that you can take on more orders as well as larger orders without having to worry about how you will pay your suppliers. Since you are selling your receivables to your factoring company, the funds they provide you with are yours to keep, there is no need to repay your factoring company as your customers will be paying them once their invoices become due. As a result accounts receivable factoring is one of the few financing options available that doesn’t require you to take on any new debt.

Additional Benefits of Accounts Receivable Factoring

While improved cash flow may be the main reason a startup business would use accounts receivable factoring, it isn’t the only one. Since your factoring company is relying on your customers to pay their invoices in order to get repaid, your factoring company will also handle all of the credit checking for you. For a startup business the last thing you want to do is spend several thousand dollars subscribing to a credit agency so that you can determine whether or not an order you receive is from a credit worthy company. Your factoring company will also handle all of your collection work so there is no need for you to spend time making collection calls and no need to purchase accounts receivable management software. Finally, with non-recourse factoring, your receivables are insured against non-payment for financial reasons. So if one of your customers goes bankrupt or out-of-business you still get to keep the funds that your factoring company gave you.

How Does My Startup Business Qualify for Accounts Receivable Factoring?

Unlike a traditional bank loan, accounts receivable factoring is not a loan, your factoring is instead extending a line of credit to your customers. As a result, your factoring company isn’t too concerned with your company’s credit or your personal credit, but rather with your customer’s good credit. So as long as you are selling to reputable businesses you qualify for accounts receivable factoring.

How Much Funding Can My Startup Business Receive with Accounts Receivable Factoring?

With accounts receivable factoring there is no limit to how much funding you can receive. The amount you are funded is tied directly to how much you have in receivables. So as your receivables grow so does the amount of funding you receive. While your factoring company will assign credit limits to your customers, since you are not receiving a line of credit there is no limit to how much you can get funded.

So What’s the Catch?

Obviously there are fees associated with accounts receivable factoring and these fees can vary based on which factoring company you choose to factor with. At DSA Factors we offer a flat rate factoring fee, meaning that we do not charge you interest if your customers do not pay their invoices on time. The factoring fee we charge is very similar to a payment processing fee that you would pay to take a credit card. So if you can afford to take a credit card, you can afford to offer your customers net 30 payment terms with accounts receivable factoring. While every factoring company charges a factoring fee on each invoice they purchase, these rates do vary and you may be subject to other fees as well. At DSA Factors we do not have any annual fees, there are no fees for setting up new accounts, we have no minimum volume requirements, and we have no long term commitment. Please read our article on how to find the lowest rate for accounts receivable factoring to learn more about what types of fees you can expect to pay for factoring.

What if I Need Additional Help Financing a Large Purchase Order?

Sometimes waiting until you invoice to get funded isn’t enough, especially if you need to pay your factory for a container before they will release it. In situations like this your factoring company may offer you purchase order financing. Purchase order financing is a short term loan that allows you to pay for a container in order to fulfill a large order. Even though you may not qualify for a business loan, since you have developed a relationship with your factoring company, and you will be factoring an invoice as a result of the purchase order, your factoring company may be willing to give you a short term loan to finance the purchase order.

So How Do I Get Started With Accounts Receivable Factoring?

Factoring is a fast and easy process where credit decisions are made in minutes, not months. Getting started is easy, give DSA Factors a call today at 773-248-9000. With just one call you can be well on your way to getting the financing your startup business needs to succeed. We can be funding you for your invoices in as little as 24 hours.

How to Make Money with Accounts Receivable Factoring

Feed your piggy bank!It may seem counter intuitive that a service that costs you money will actually make you more money, but it is true. As the old saying goes “it takes money to make money”, and this is true when it comes to accounts receivable factoring as well. There are actually a handful of ways that factoring can help your bottom line, and some may not be so obvious.

Comparing Factoring Rates

The first thing you need to look at is the cost of factoring.  If you currently take credit cards for payment, factoring fees are very similar to the fees that the credit card companies charge you, and possibly even less than Discover and AmEx.  As a result, you will already have the factoring fee built into your pricing.  However, it is important to make sure that your factoring company is charging you a flat rate fee, otherwise if your customers pay late you may wind up paying two or three times a credit card fee in interest. DSA Factors offers low flat rate fees, so you know exactly how much it will cost to factor an invoice.

Factoring Leads to Larger Orders

Often times your customers may have the same cash flow crunch that you have.  They may not be able to pay for an order until the merchandise in the store sells.  That is why it is important for them to be given 30 days to pay for the merchandise that they buy.  However, while the credit card companies allow you to pay each month, if you don’t pay the credit card bill by the due date on come the late fees and interest charges.  So when a customer pays by credit card, they need to be absolutely sure that they will have the money to pay for it when that bill arrives in the mail.  As a result, they may be hesitant to place a large order out of fear they won’t be able to pay for it on time.  When you offer terms to your customers, this isn’t an issue.  It is generally accepted that if you pay for an invoice with terms a little bit late, you won’t be hit with late fees or interest charges.  As a result you can sell more merchandise to your existing customers, as well as pick up major retailers, such as Walmart, TJX, Costco, or Amazon, who will only buy merchandise on terms.

Benefit from Increased Cash Flow

If you currently offer terms to your customers and aren’t factoring your invoices, you can also benefit from the increased cash flow factoring will provide you with.  You can use that improved cash flow to pay your suppliers faster, which in return will allow you to increase the volume of business that you do.  After all, if you can get a container onto a ship thirty days earlier, you will be able to fulfill more orders faster, which will also lead to quicker reorders.

Outsource your accounts receivable

Furthermore, you can save money is on salary.  By outsourcing your A/R department to a factoring company.  You don’t need to have employees making collection calls and sending out account statements, your factoring company will handle this for you.  As a result, your employees can focus on things like making sales, marketing, or product development which will translate directly into higher sales volume.

Credit Checking and Insurance

Finally, you will save money on the cost of doing business.  Since your factoring company will do all of the credit checking for you, you no longer need to subscribe to expensive credit agencies.  If your factoring company offers non-recourse factoring, as DSA Factors does, then you will also eliminate bad debt as your factoring company assumes responsibility for customers who do not pay their bills.

Grow Your Business with Accounts Receivable Factoring

As you can see, accounts receivable factoring can be a great way for your business to increase its revenues while eliminating expenses.  If your business can benefit from increased cash flow, then factoring may be the best way to make money and grow your business.

What is the Chip?

EMV ChipBy now everyone probably has received new credit cards with an EMV chip in them.  That is because on October 1st the rules changed for how credit card fraud is handled.  As a consumer you have nothing worry to worry about as you are never responsible for fraud, but as a merchant or a bank it is important to understand how the new rules work.  As of October 1st, merchants are now responsible for fraud if they allow a customer to swipe a card using the magnetic strip when the card has a chip on it.  Banks however are still responsible for fraud on cards that do not have chips on them yet.  So it is important if you are a merchant that you purchase new readers and require your customers to use the chip if you don’t want to be responsible for fraudulent transactions.

The way the chip works is that it creates a unique transaction code every time it is inserted into a credit card reader, while the magnetic strip that we have always used simply contains static data that can easily be copied.  As a result, it is nearly impossible to counterfeit cards that use a chip.  Now of course there is a lot of expense to this new technology.  The credit card companies have been sending out new cards to all their customers, and these cards cost a lot more to produce than the old magnetic strip cards did.  For merchants the major expense will be in purchasing new card readers and training employees in how to use them.

Now if you are wondering just how serious credit card fraud is, in 2012 there were worldwide losses of $11.3 billion, with nearly half of that coming from the US.  That year in the US the banks lost $3.4 billion to fraud, while merchants lost another $1.9 billion.  The United States is the only country in the world where credit card fraud is growing each year.  So while these chips might be adding more expense to businesses, if it can reduce these losses then it would be well worth the investment.

If you are wondering if these chips really work, all you need to do is look at the data.  These chips have been in use since 1992 and are used in 80 countries.  Canada adopted the chips in 2008.  In 2009 they reported CAD$142 million in fraud, but by 2013 that number had dropped to only CAD$29.5 million.  The same effect was experienced in England where losses have decreased by 67% since chips were rolled out in 2004.

Of course there is also an added benefit to consumers when they use the chip.  Because it is tougher to create counterfeit cards, it is also harder to fall victim to identity theft.  So consumers can shop with more confidence, as they no longer need to worry about data breaches, such as the one that happened at Target in 2013.  While the Target breach got a lot of publicity, and several other big box stores got publicity as well with their breaches, the fact is there have many more breaches at smaller stores that don’t warrant the publicity of a big box store, but overall they have a much greater impact than just one big box store does.  Of course consumers only get this protection if they are shopping at stores that are able to accept chip technology.  This of course gives merchants one more reason to want to upgrade their credit card readers, their customers will probably feel safer shopping in their store if they offer this new technology.  So the next time you go shopping, it may take longer to check out with these new chips, but the added security should be well worth the hassle.

Stay on top of business news by following DSA Factor’s Factoring 101 Blog, and if you have any questions about accounts receivable factoring, give us a call at 773-248-9000.