QUESTION:

I have a startup that’s about 1 year old, and just starting to bring in revenue. I have a new, credit-worthy customer that I’ll be invoicing regularly about $20-30K per month, but will probably take 45 to 60 days to pay. In the past, I’ve setup A/R (accounts receivable) financing for my companies. What can I expect in terms of fees and percentage rates in the current climate, and for a company in our stage? I’ve heard about firms charging as much as 3.5% to 4% of the invoice amount for 30 days! That’s a LOT more than I paid in the past.  Finally, any recommendations for A/R financing companies or factors?

ANSWER:

Ella Zalkind

Ella Zalkind

by Ella Zalkind, Legal Officer/VP, Action Business Solutions

It sounds like your startup is in the middle of a very exciting time of growth. You are prudent to consider A/R (accounts receivable) financing which can be a short term or long term financing option without tying up your company in debt. Depending on the details of your customer and what due diligence would disclose, you could be looking at something like 5% for an invoice that is out for 30 days and then incremental increases for additional days. While this may seem a bit high at first glance, you should consider the benefits– you would receive money much sooner than if applying for a traditional bank loan (which rates may or may not be better; or you may not qualify); you would receive additional benefits like customer screening, a/r management, general business consulting and others. Also, you could expect that the rates to go down (and the percent of funds advanced to go up) once you establish a productive relationship.

Market data is a bit hard to find because the rates are so individualized and depend on an aggregate of so many factors.  I’m attaching an article from Bloomberg that quotes some information from last summer.  However, it should be understood that the rates discussed are more typical of larger businesses.  Startups tend to be much smaller and are subject to different terms.  Still, this article is a good frame of reference:  http://www.bloomberg.com/apps/news?pid=20601109&sid=a3YCv.hQNab0

Here’s the operative language from the article:

“Factors typically release 80 percent to 85 percent of the value of an invoice to its client, then charge 3 or 4 percentage points above the prime interest rate until the invoice is paid, said Stewart Chesters, CEO for North America in Chicago at Bibby Financial Services, a U.K.-based company. A 1 percent fee for collections and credit services is customary...”

I am happy to chat with you and give you more information. I am the principal of a small factoring company in NY/NJ. We could see what could make sense. I am also a business attorney and could perhaps give you some info if you decide to go the route of a bank loan. I’m always happy to chat. Feel free to drop me a note or call.