Factoring 101
Hey! Welcome back to INTRO to Finance. I’m Jason, and this week we’re trying something new. Instead of answering questions, I’ll be the one asking the questions.
We’re interviewing Patrick Woloveck, the COO at VendorTerm. His firm provides non-dilutive growth capital via Factoring. This week we’ll learn a little more about his firm and the funding they offer.
Tell us why VendorTerm was started.
We realized there was an opportunity to craft this form of financing specifically for fast-growing startups. The majority of startups are not suited for the growth requirements of venture capital. We created an alternative, many times a complement to equity, that is quick, easy, and flexible. Since 2019, we have provided $50M in non-dilutive capital to over 100 startups.
What is Factoring? How does it differ from Invoice Financing?
Invoice Factoring IS NOT A LOAN.
Invoice Factoring is simply the sale and purchase of Accounts Receivable. Transactionally, the Factoring company purchases unpaid invoices (less a fee) and is paid directly from the Payor. The setup process takes less than a week.
Invoice Financing IS A LOAN.
Factoring is many times confused with Invoice Financing where the vendor still manages collections and the transaction is a loan/line of credit on your balance sheet. Loans take weeks to close, require more diligence, have covenants, and are locked into a contract over a longer period of time.
Who is the financing designed for?
Startups with enterprise customers, large deal sizes, long payment terms.
Since Factoring companies are effectively paid back by the startup client (Payor), they like the payments coming from large creditworthy buyers. Good examples would be publicly traded, well-capitalized privately held, or government entities.
Ideally, transactions are between $100k - $1M. Given the Factor fee to the startup, usually, startups are unable to see much benefit from putting any smaller capital amount to work. From the Factor point of view, the return economics don’t make sense on smaller micro deals.
Why is now a good time for companies to use Factoring?
COVID-19 has presented tremendous challenges to both investors and startups. Corporations as Payors are looking for any way possible to hoard cash – effectively interest-free loans. Unfortunately, this trickle-down effect is being passed on to smaller vendors in the form of extended payment terms. This environment makes even more sense to have a factoring option on hand when startups are not able to wait for the now 45, 60, 90 days to receive payment.
How does the pricing compare to other financing options?
Factoring companies bear more risk, and as such, have a higher cost of capital. It’s important for founders to understand the difference between the two products and the tradeoffs associated.
Thanks for joining us. Is there anything else that you would like our subscribers to understand about Factoring?
I think Factoring 101 is covered. I’m always happy to be a resource for any questions around factoring, alternative capital, etc. Feel free to shoot a note over to me.
Thanks to Patrick for answering our questions. If you’re interested in accessing non-dilutive financing like Factoring – create a profile on INTRO.
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