One of the things that can stress out any edtech startup founder is cash flow, especially when it comes to waiting on people to pay their invoices. While there is a range of ways you can go about getting your cash flow on track and reducing stress, sometimes you will be faced with the issue of not having enough funds on hand every month to cover bills. This is particularly the case when you’re building your organization from the ground up.

If you have had enough of finding yourself in this stressful position, and/or if you need more cash to grow your venture, bring on additional staff members, or implement new projects, it pays to consider an option that lots of people just don’t know much about: invoice factoring. Read on for the ins and outs of this method.

What Is This Type of Financing?

Invoice factoring, also known as receivable financing or debt factoring, is a method of financing that is provided by specific factoring companies to organizations selling goods or services to other ventures (B2B) or government departments (B2G).

Factoring businesses free up cash flow for firms by converting their outstanding invoices into cash that can be used straight away — these bills are seen to be representing a promise that delivered services or goods will be paid for in full. If your edtech organization went down this path, you wouldn’t have to wait for invoices to be paid, but could instead get access to funds as soon as the factoring firm purchased your bills.

Receivable financing businesses will obviously only decide to take over invoices though if they believe that a client’s customers will pay up their accounts in full and on time. As such, not all edtech businesses will qualify for this type of cash advance.

While the requirements from provider to provider can vary quite a bit, usually you’ll find that factors will deal only with businesses with credit-worthy customers, and those without any pending tax or legal problems. As well, some factoring firms will have a set maximum advance value they impose; while others won’t touch invoices which are due and payable in 90 days or over.

The Steps Involved in Invoice Factoring

If your edtech startup wants to work with a factor, you will need to submit an invoice to them to see if both your venture and the bill are seen as an eligible option. Your customer(s) will also be looked into, to see if they are a suitable credit risk or not.

If you get approved, you will need to sign an agreement with the factor. This paperwork will typically cover elements such as the particular invoice and client involved, and the maximum dollar amount that can be advanced to begin with.

From there, the receivable financing company will usually provide an advance amount that comes to a maximum of 80 percent of the value of the invoice. (This number can vary though, and typically ranges between 70 and 98 percent.) A second payment, known as the “reserve,” is then made later. This remaining percentage of the invoice, less a factoring fee, will be transferred once the bill has been settled by the original customer.

Note, too, that factoring companies often send out “notice of assignment” letters to the clients whose invoices they have taken charge of. This paperwork tells people about the change in the invoice “ownership,” and instructs people on whom to make future payments to, so be sure to inform clients you use a factor.

Pros and Cons to Be Aware Of

There are various pros and cons of invoice factoring to be aware of. For starters, an obvious benefit is the fact that it frees up cash flow, and can do so very quickly. In addition, your edtech business can save time too, since you and your team don’t have to try and chase up payments from customers. The service is flexible too, and need only be utilized as and when you require it, which is a plus.

Another pro is that the fees involved in factoring can be less expensive than those involved if you have to arrange a cash advance or loan from a lender to cover cash flow issues. As well, a personal credit score, or extensive business paperwork, isn’t usually required to get invoices factored, which can be great when you’re running an edtech startup without much trading history.

On the other hand, there are some potential cons to be thought about. As an example, some factoring companies aren’t very clear about their charges upfront, and can add “hidden” fees on things like credit checking, application and payment processing, and even potential late fees if invoices aren’t paid on time by your clients.

Furthermore, keep in mind that you also lose control about how your clients are dealt with once a factoring firm takes over ownership of a bill. If the factor is not polite, respectful, and clear when dealing with your clients, you could have the unfortunate outcome of losing business.