In my previous article, we discussed whether brokers should start their own factoring companies. In this article, we discuss how to finance a factoring company, should you decide to start one.
While owning a factoring company can be very rewarding, it’s also very risky. And most owners make their riskiest decision before funding their first deal – the decision on how to finance their own company. The wrong decision could wipe you out financially and have long-lasting repercussions. Make this decision very carefully.
There Are Many Ways To Fund A Factoring Company.
Each way has varying degrees of risk. How you proceed depends on your risk tolerance. For example, when I first financed my factoring company, I made two upfront decisions. The first decision was that I would not risk all my capital. I wanted to make sure I would not be wiped out if I failed. And second, I decided not to take friends and family as investors. These two decisions guided how I funded my company. I believe they are the two best business decisions I’ve made so far.
Your Savings and Investments
Using savings and investments is probably the best way to finance a factoring company. This method is also how I funded my company 10 years ago. I spent a decade in the corporate world, working up the corporate ladder. Meanwhile, I was accumulating seed money for my company. Eventually, when the time was right, I liquidated my savings and stock options and used that seed money to fund my company.
As you can imagine, this strategy takes time, patience, and determination. However, it’s also the safest, as you can only lose some of your money. By the way, be sure to invest only whatever amount you are willing to lose. Also, don’t invest all your money. Keep a small reserve.
Retirement Savings
Investing retirement money to start a factoring business is a very risky proposition, as you could end up without a retirement alternative.
Home Equity
Using a home equity line of credit to fund a factoring company is also very risky. Obviously, you are putting your home at significant risk. If things go wrong, you could lose your home and ruin your credit, resulting in very long-lasting effects in your life. And remember that the risk is magnified by the fact that the first years in a factoring company are often when you are most likely to fail.
Investors
I do not like the idea of having investors since I like my independence. However, I know people who have built successful factoring companies using this funding method. Keep in mind that having investors is an important responsibility. Have an attorney draft formal documents and advise you on how to handle investors effectively.
By the way, be careful about getting loans from friends and family for two reasons. First, they may want to become involved in your business. There is no such thing as a ”silent partner” when money is involved. Second, the relationship could sour if the investment is lost.
White Label Factoring Programs
Some factoring companies offer white label programs, also known as private label factoring programs. These programs can work in many ways; however, in most cases, a factoring company asks you to make an upfront capital investment to seed the company. Once the business is set up, you provide the branding and the sales services. The factoring company provides back-office support and working capital. This arrangement can be an attractive alternative for sales-minded entrepreneurs who don’t have a lot of credit management experience.
Refactoring Lines
Lastly, there are a number of financing companies that can provide refactoring lines – financing facilities that can be used by factoring companies to fund invoices.
About Marco Terry
Marco Terry is the managing director of Commercial Capital LLC and Commercial Capital LLC (Canada), a leading factoring and purchase order financing intermediary. He can be reached at (877) 300 3258.