Imagine embarking on a long road trip without a map or guide and no clear view of your journey or destination. This would be like starting a business without having a business plan to follow. A business plan projects your supply and demand, and also maps your financial expenses and growth.The Financial Section of the Business Plan
The Small Business Administration recommends new businesses to have projected financial statements for the next 12 months in the plan, and fully estimated start-up costs. Invoice factoring --selling invoices to a third party-- helps small businesses early on when looking for ways to ease startup costs and speed up profits.
How Factoring Boosts Your Financial StatementsFactoring is:
1. A bank loan alternative
. New businesses may be rejected for bank loans due to high concentration --having only a few steady clients, not so with invoice factoring.
2. Competitively priced
. Factors buy your risk and charge a small percentage in return. The rates for accounts receivable factoring
are also very competitive, but especially when compared to interest rates on bank loans.
3. Timely cash
. Invoices usually give terms of 30-90 days. Although this is what your clients expect, it can inhibit growth for a new business. When purchasing your invoices, a factor will pay you much quicker, and also assume the responsibility for collecting the debt.
4. Bad debt reduction
. For prospective new clients, a factor will compile their financial data and history for you to make sure the least amount of risk is being taken on.
5. A business asset
. When you take advantage of the benefits of factoring, it counts towards your credit reliability. This puts your business in a much better light when applying for other sources of funding down the line.
How to Calculate Factoring into Your Plan
Now that you understand how factoring can help give your new business financial success, incorporating it into your business plan is easy once you have chosen your factoring company and know the exact terms.
1. Give your business more startup capital, during this first critical year, for inventory, equipment, and software purchases. You will be able to adjust your revenue for the year because the factor pays you for your invoices much earlier.
2. Reduce your liability (non-paying customers) and expenses (time spent doing in-house collections) with factoring. Remember, factors have assumed risk for your business when buying your invoices. They therefore use the most professional methods to collect on your invoices and maintain customer satisfaction.
3. Calculating invoice factoring into your income statement for the first year boosts your overall financial performance and is therefore an asset to your business. Factoring keeps your liability low and raises your assets, giving you a higher net worth.
Due to its quick cash availability, invoice factoring as of late has been used primarily in debt-relief situations. However, it is one of the best options to choose when constructing your roadmap for a new business, to help avoid emergency cash-flow situations in the future and to give your business overall success.