Deciding to create a startup company is a risky decision. It is one that can take a product or service from obscurity to the forefront of the commercial world. Conversely, it can fail to get off the ground and become a financial disaster. The difference between success and failure for a startup company relies on a variety of factors. Is the business being properly financed and managed? Does it offer a unique service or product that is in demand? Is the organization’s infrastructure scalable? With all the issues that startup companies face, it’s good to be aware of all possible options. Two key financing options that can help startup businesses become strong and stable are factoring and PO financing. You may wonder, “How can factoring and PO financing help my startup?” Below, you will find that they can both help leverage stable financial transactions to gain immediate workable capital.
Leverage Financial Transactions
Factoring and Purchase Order (PO) financing are both methods that allow companies to receive assistance based upon financial transactions. BusinessDictionary, a resource dedicated to providing definitions of business terms, provides the following definitions of these two financial transactions:
- Factoring – A factor, the institution that provides the capital, advances funds to a producer or manufacturing firm based on the security of the goods that will be produced or manufactured. This generally includes the sale of invoices for products that have already been delivered and are awaiting payment.
- PO Finance – Purchase order financing is the process in which a business uses purchase orders from a credit worthy customer to secure financing. The business will seek a PO financing firm to leverage their customer’s credit worthy PO in order to gain capital. This capital is then used to allow the business to fulfill the purchase order.
A Minimum Requirements Warning
While a startup company can use both factoring and purchase order financing to help their startup grow, both of these transaction types have minimum requirements that must be considered. Unfortunately, neither of these options will help a startup that has yet to begin operating.
- Minimum Requirements for Factoring – The primary requirement for a factoring transaction is that the customer that has been invoiced must be credit-worthy. The decision to provide capital is based solely on the invoiced company’s credit, and not the credit of the company that provided the goods. However, most financial institutions will require the company seeking factoring is currently profitable, has no tax issues and does not have any current liens. There are many different factoring companies in operation and each of them will have their own unique requirements. It is highly advised to thoroughly research their minimum requirements prior to seeking this form of financing.
- Minimum Requirements for PO Financing – PO financing has more stringent requirements. As with factoring, the exact requirements will depend on the financial institution that is providing the financing.
- Startup must have been in operation for at least one year.
- Must have a proven transaction history with the customer making the purchase, or customers similar to them.
- The purchase orders must reach a minimum total, which is usually around $100,000.
- The purchaser must be credit-worthy.
When To Use These Options to Help
Now that you know what factoring and PO financing are, and their minimum requirements, when should you use them? Inc.com, a publication dedicated to the business world, provides the below situations in which these funding methods can prove useful for a startup:
- Cover the Cash Gap – Based on a study conducted by the International Business Owners Survey, the global average period between when a good or service is invoiced and when it is paid back is 45 days. This means that most companies will experience a cash gap between the time they submit the invoice and when they receive payment. Since the invoicing company has already used much of their capital to fulfill the invoice, they may be lacking funds to fulfill other orders or continue to operate. This is a common issue that many startups will experience during their initial growth periods, and the perfect situation to utilize factoring. The invoices can be immediately sent to a factoring company and the startup can receive funds.
- Adjust to Unexpected Growth – Companies that produce goods regularly receive purchase orders that can easily be filled. After a company has been in business for a while, they may receive an unprecedented surge of growth. They may receive more orders, or simply larger orders from their primary clients. Fulfilling these larger orders may be outside of the company’s capabilities. This is when purchase order financing can be used to leverage the new purchase orders to receive the capital required to fulfill them. This helps smaller companies be able to fulfill larger orders and grow their infrastructure.
By leveraging financial transactions, both before and after goods have been provided, startups can operate beyond their current financial capabilities. This allows them to grow at unprecedented rates by ensuring they can fulfill large orders and avoid delays due to a cash gap.
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About Jakk: Jakk Ogden is a professional self-employed blogger and the founder / owner of Technology Blogged. 22, with a love for good writing, you'll find me playing 'Drag Racing' on my HTC One X and rocking a pair of Grado headphones. If you love technology, be sure to subscribe to my feed for unique editorials. Find me on Google+. View author profile.