How Startups Can Survive a Recession
Small or startup businesses are at a maximum risk during a period of credit crunch or recession. This is mostly attributed to some factors, which are simply out of their control. The cash flow is important for any business, whether big or small. Startup businesses do not have huge capital in hand or any assets that they could use. Starting anew, their credit scores are also low. In this situation they are highly vulnerable to be badly affected during the credit crunch or recession. At this juncture, factoring can help startups to survive even in this critical situation of recession. It is the availability of the working capital that makes it easier for them to survive these tough times.
Small business owners generally find themselves in a very tricky situation. They may have had some sales and raised invoices on customers. However, because of the terms of business, they may receive payments only after a period of 60 days or in some cases even after 90 days. But presently, they have to make payments for other expenses like rent, taxes etc. Though their sales money is enough to take care of these expenses, they are not received immediately in hand. So, what would startups do in such a situation? They have to do their payments, but do not have funds in hand.
In such a case, they may generally approach a bank for a loan. But, having just started their business, the banks are seldom prepared to offer loans. So, to take care of their funding needs the startups can make use of what they have in their hands, namely the credit invoices. They may sell these invoices to the factoring companies, who in turn will provide them with immediate cash. They would generally charge a small percentage as processing fee and pay the balance amount to you.
Factoring of invoices involves a search for a factoring company, which is prepared to purchase your invoices. For the factoring company the creditworthiness of your customer is more important, and based on this they will offer you even up to 85 to 90% of the value of the invoice amount. After collecting the entire amount on the due date, they would pay you the balance amount after deducting the factoring fees. This procedure does not take more than 48 hours and you would have funds immediately to take care of your expenses. The process to procure a loan would normally take a lot of time like 4 weeks or so and would require high credit scores.
While factoring companies are not worried about your credit scores, they definitely would consider your customers’ credit scores. The factoring companies can help you find credit worthy customers to rule out bad debts. So, by factoring you even eliminate the bad debts from your financial statements. You can bring in greater discipline in your finances and some factoring companies even guide you to do so. You can easily plan out the sale of your invoices depending on the needs of funds. If you need funds urgently for any new project, you can factor your invoices and funds would be wired to your account in a matter of 48 hours.
Factoring of invoices helps you to manage your fund flow better and ensures that you do not lose any business because of lack of funds. You can also get the benefits of trade discounts with timely payments. For startups, the factoring company services can prove to be worthy tools to survive recession.
Kris Koonar is President of Crack Marketing leading a team of Internet Marketing Consultants with over 5 years of experience and 100’s of projects. Kris can be contacted at 1.877.270.7170 or kris@crackmarketing.com
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