As a startup owner, securing financing is likely a top priority. We tend to think of financing as long-term financing. That is, raising permanent equity capital or long-term debt. But short-term financing is another critical consideration. This is especially true for cash-strapped startups. Accordingly, factoring is a form of short-term financing that can help with cash flow challenges. Under a factoring agreement, you sell your trade receivables to a factor, which is a specialist financial firm. The factor then collects the receivables on your behalf, which it uses to pay itself back for the cash it advances you upfront. This article will examine what factoring is in more detail. <\/p>\n\n\n\n
All businesses generate sales, which refers to the cash they receive in exchange for the goods or services they provide. In practice, most businesses sell their goods or services to their customers on credit. This means the customer receives the goods or services before paying for them. The terms of credit depend on your industry and customer relationships. However, credit periods of 14 to 30 days are standard. <\/p>\n\n\n\n
Where your startup provides goods or services to customers on credit, your customers are known as trade debtors.<\/p>\n<\/div>\n\n\n\n
Until your customer pays you back, you have a legal claim against the customer. This claim is an asset because it represents money the trade debtor owes you. Therefore, accountants treat this asset as a current asset because it is similar to cash in the sense that you can demand payment at the point it is due. <\/p>\n\n\n\n
However, in practice, there are trade receivables<\/a> you are unlikely to recover from specific customers. Additionally, you will likely have your own suppliers that you need to pay (your trade creditors). Both raise problems since you may not have enough cash to meet your obligations despite your customers owing you money. <\/p>\n\n\n\n A trade receivable is essentially a promise that your startup\u2019s customers will pay you in the future. The law treats trade receivables as an asset. That is, you can buy and sell a trade receivable just like you can a piece of property or machinery. <\/p>\n\n\n\n General financial management principles say that, in some cases, it is better to have cash now than the promise to receive cash in the future. This is particularly true when you are cash-strapped. As a result, there is a market where specialist financial institutions called factors will purchase your trade receivables<\/a> upfront at a discount. This discount reflects their service by giving your startup cash now. <\/p>\n\n\n\n\n\n Continue reading this article below the form\n <\/i>\n<\/a>\nHow Does Factoring Help with Cash Flow?<\/h2>\n\n\n\n