Factoring for Business Start-ups as Protection Against Payment Default
Factoring can be a worthwhile alternative for entrepreneurs. Why? The start-up entrepreneur is fast liquid, bank-independent and also his demands are secured. In addition, office work is significantly reduced due to outsourced debtor management. This leaves more time for the important tasks in startup: to promote the distribution of your own product or your own service.
Why is liquidity so important to founders?
Basically, liquidity is critical to any business, not just start-ups, because it’s the necessary foundation for growth. But especially small companies are more dependent than large companies for their customers to settle invoices in a timely manner. As soon as claims are outstanding for a certain period of time, liquidity drops significantly and the company is severely impaired. In the worst case, it comes to stagnation to the point of insolvency. This is exactly where Factoring comes in.
How does factoring work?
Factoring is a purchase transaction and is not one of the forms of financing that provide capital before the business starts, but continues to provide the company with liquidity during operations. A factoring service provider buys the open receivables of a company. In return, for a fee, the company receives up to 90 percent of its claims within a few days. The advantage: In the case of sale of receivables, the prerequisites which start-up founders have to meet are generally lower than with bank financing, since additional collateral usually lacks the necessary collateral.
But for start-up founders, factoring provides yet another advantage. Thanks to their collateral, they can react flexibly to future challenges, as they no longer have to rely on their customers’ fast incoming payments and receive payments directly from the factoring service provider.
The advantages of factoring at a glance
Due to the lack of time and staff, many young companies lack professional payment management. According to surveys, nearly twelve percent of commercial customers in Germany have up to 60 days to settle a bill. Exactly these two months can become a true test, especially for start-up entrepreneurs. If there is no liquidity, no new investments can be made, staff hired or their own bills paid. Thus factoring has the greatest advantage for you as protection against liquidity bottlenecks.
The secured invoice settlement bypasses liquidity bottlenecks. The company remains stable and competitive. Wages and salaries can be paid on time and investments made.
Improvement of the equity ratio
With the help of factoring, trade receivables are released from the balance sheet. If, in addition, liabilities are settled, the company’s balance sheet shrinks, which simultaneously improves the equity ratio.
Factoring secures a company’s revenue by meeting payment targets at all times. That’s why start-ups can focus more on the actual goals of the company. New markets can be tapped faster and growth scope used. This also benefits their own competitiveness.
Conclusion: factoring effectively helps start-ups
For founders, factoring offers many advantages. You are protected against bad debts and also save expenses for office work and even additional staff. By securing liquidity, they also gain the necessary freedom for further growth.