Startups are one of the main engines of innovation, but they are not typically rolling in cash. A new form of factoring, however, is helping create working capital for startups. More accessible funding for startups only expedites their time to market and in turn, their ROI.
In traditional factoring, a financial institution will take a company, evaluate their creditworthiness and assets. Then, the financial institution will purchase the company’s invoices for a discount and collect on them in lieu of the company. After the invoice is paid to the financial institution, anything paid over the factor percentage will go back into the company.
How P2BInvestors Differs
In an emerging modified form of factoring, the company’s invoices are still evaluated.
But, instead of a financial institution purchasing a company’s invoices outright, companies like P2BInvestors extend a line of credit based on the valuation of the company’s invoices.
While P2B resembles a traditional financial institution in that its line of credit comes with rates of 12 – 18%, the rate usually goes down as the company’s risk decreases.
Despite seemingly high rates, what makes this modified form of factoring so attractive for startups is that the agreement is only for one year.
Startups have a reputation for being highly experimental, and investor expectations along with long-term loans can shift the focus from building a solid company to rushing to show a return on the investment. A year commitment gives your startup enough time and breathing room to get things running and doesn’t tie your hands if things don’t work out immediately or at all.
To make the deal even sweeter, if the company chooses to open a line of credit with a traditional bank, borrowers are not penalized for early repayment.
“To be eligible, startups must be at least a year old and have at least $500,000 in annual revenue or $50,000 in monthly revenue, explains P2Binvestor’s co-founder and CEO, Krista Morgan. She continues by explaining that the company will then “look at collateral– such as inventory, receivables, and ongoing customer contracts – to determine the size of the loan.
This type of innovative lending structure has helped startups like artisanal ice cream maker, Phin & Phebes to raise $510,000 to expand the company’s product line into New York City stores.
Phin & Phebes was able to keep current on payroll, and is now able to buy ingredients freely without having to wait months up to six months for customer payments to finally pay her.With the line of credit from P2BInvestors, this little ice cream shop has seen over 170% growth this year in revenue. Click To Tweet
With the help of factoring, startups will be eligible to secure a line of credit within 3-5 business days which allows them to continue to fill orders and have more liquid operating cash available. This is in stark contrast to a traditional bank loan which can take months to process a line of credit.
Factoring in general uses invoice evaluations and not the company’s history of net worth solely, to grant smaller companies easier access to cash they wouldn’t otherwise receive from traditional lenders, which helps smaller businesses to thrive and remain competitive in the global marketplace.