Exploring Invoice Factoring Solutions for Tech Startups

You’re not imagining it. Whether you’re in a tech hub like Toronto, Ontario, or Vancouver, British Columbia, or any of the smaller cities, obtaining and managing capital as a tech startup has never been more challenging. On this page, we’ll walk you through what’s happening and provide funding solutions for tech startups, such as invoice factoring, that can help you build a stronger company.

Why Cash Flow Management is Difficult for Tech Startups

Before we get into solutions, let’s quickly review why tech startup cash flow is so complex today.

R&D Costs Are High

Even if you’ve done well with startup capital management, research and development (R&D) requires continuous capital injections. The cost of equipment, payroll, and running experiments can really add up. Pausing is rarely an option, and if anything slows or reduces your inflows when it’s time to cover a significant R&D expenditure, it’s easy to come up short.

Payment Cycles Are Long

Managing startup finances is challenging to begin with. However, the average days payable outstanding in the tech sector is 55 days, with low-performing companies reaching an average of 82 days, per JP Morgan. Cash reserves dwindle as the months tick by waiting for payment.

Revenue is Often Irregular

Often, tech businesses don’t see revenue unless they’re launching an update or new product. While subscriptions can help stabilize cash flow somewhat, they don’t usually make up for these rapid-burst cycles.

Churn is a Killer

One of the most common tricks of the trade is to offer products or services free to new customers for a period of time. Particularly when a tech company is in the startup phase, it’s very difficult to predict what “normal” churn is in these situations. Because businesses can’t predict who will stay and who will go, cash flow becomes even more unpredictable, too.

People Costs Are Demanding

Although Canada has around two dozen tech unicorns today, the country doesn’t exactly have the equivalent of Silicon Valley, which unfortunately means much of our talent leaves for more opportunities. Tech companies fight for remaining talent, increasing recruitment, salaries, and retention costs.

Raising Capital is Difficult

Funding for tech startups soared during the pandemic, but the bubble has officially burst. Tech funding has declined rapidly, with a 45 percent drop in year-to-date funding, per Tracxn.

We’re now experiencing the “Great Tech Shakeout,” as The Globe and Mail reports. Profits are down. More than 360,000 jobs have already been cut. Tech startups will need to be especially savvy to survive this famine cycle.

Funding Options for Tech Startups

While venture capital is one of the most popular startup financial solutions, it’s even more difficult than usual for tech startups to procure these days. We’ll explore some alternatives below.

Traditional Loans

Established businesses typically turn to traditional bank loans first. However, startups have always had difficulty qualifying for these, and getting approved today is even more challenging.

Asset-Based Lending

Businesses that don’t meet bank criteria for an unsecured loan can sometimes have better luck with an asset-based loan. However, this approach doesn’t always work in the tech sector because the technology itself tends to be the most significant asset, and it isn’t easy to value it in the startup stage.

Credit Cards

Sometimes, commercial credit cards are a viable short-term solution when expenses are small and the balance can be paid in full each cycle. However, it’s important to note that most come with a variable interest rate, which can make carrying a balance especially risky.

Lines of Credit

A line of credit works similarly, though a larger balance is usually available. That means where a credit card might help purchase a computer or lunch for the team, a line of credit could potentially fund payroll in a pinch or be used to purchase several systems. Again, this method works best when the balance can be paid off immediately.

Invoice Factoring

A final option for tech startups is invoice factoring. Rather than borrowing money, you sell your unpaid B2B invoices to a factoring company at a discount and get working capital immediately.

Factoring is sometimes confused with invoice financing for startups. However, they are distinct. With factoring, you sell your invoices. With financing, you take a loan out and use your invoices as collateral.

How Invoice Factoring Works for Tech Startups

You continue doing business as you usually do when you leverage invoice factoring. However, when you send your business clients their invoices, you also send a copy of any invoices you wish to factor to your factoring company.

The factoring company immediately sends you up to 95 percent of an invoice’s value. You can use the cash however you wish, whether to fund payroll, purchase equipment, invest in R&D, or anything else. The factoring company waits for payment from your client. When your client pays, the factoring company sends you the remaining balance minus a small factoring fee.

Top 7 Benefits of Invoice Factoring for Tech Startups

Now that we’ve covered how it works, let’s explore the benefits of invoice factoring for tech startups.

1. Most Businesses Qualify

You can qualify for tech business factoring even in the startup phase. Factoring companies are more concerned with the creditworthiness of your clients than your creditworthiness.

2. You Get an Immediate Cash Flow Boost

Factoring companies usually pay via ACH, so cash hits your bank account in about two business days. However, some offer accelerated options and can even get your cash to you on the same day you submit your invoice.

3. There’s No Debt and No Lost Equity

Generally speaking, there are two ways to secure working capital:  by taking on debt that your company must pay back or by giving up equity in your company and losing some control over it. Neither is ideal, but they can play a vital role in business growth.

You can think of factoring as a third option because your business isn’t giving up control, and your customers clear the balance when they pay their invoices.

4. It Makes Cash Flow More Predictable

Creating and sticking to a budget is challenging when you can’t predict when cash will come in. Factoring makes it easier to predict your cash flow because you’re essentially choosing your payday rather than waiting for clients to pay.

5. It’s Flexible

You may not always need factoring, and that’s okay. It’s one of the few genuinely flexible liquidity solutions for startups. Factor just the invoices you want to factor. Start factoring now, or sign up and wait until you need it later. The choice is yours.

6. It Scales with Your Startup

With factoring, you don’t need to keep reapplying to gain access to larger lines or sums. Your available funds grow with the volume of your invoices, so your access to cash increases as your business grows automatically.

7. Back-Office Support is Included

Startup invoice management can take considerable time, especially in industries like tech, where it often takes months to get paid. However, collections services are included with factoring, saving you time and money. Some factoring companies offer invoice preparation and other services to streamline your back-office processes even more.

Get a Free Factoring Quote for Your Tech Startup

If it sounds like invoice factoring is the ideal cash flow solution for your tech startup, take the next step and request a free rate quote.