The Basics of Funding Terminology

Most startup entrepreneurs want to get into the game, but they are not really sure what they need in order to get started.  The best thing to do is focus on the rules of financing and funding terminology.  This is a very important aspect when it comes to getting your feet wet in the entrepreneur world.

First things first, take a look at the terminology.  Accounts receivable is basically the invoice value of the goods that have been shipped out from the warehouse.  Purchase orders are written requests to purchase goods for shipment immediately, or at a later specified date.

So, what is the more valuable of the two?  Accounts receivable, of course.  This is an accurate representation of the cash value that you have on hand, which is pertinent to financial partners that you may consider doing business with.  One thing that entrepreneurs usually learn very quickly is that retailers will often change their purchase orders based on their current needs in the industry.  This is why banks don’t really want to finance based on purchase orders.  This is because it is considered to be very risky.

Most commercial lenders that finance for accounts receivable will only help you when it comes to financing for customers that have a good credit history or payment history.  Lenders will usually term these customers as good credits and eligible receivables.  Lenders will also usually only loan money for up to 80% of the eligible receivables.  This can prove to be painful during the startup period.  Even more painful is the fact that most banks will want to make sure that your business is viable for a year before they will give you a line of credit.

Sometimes, companies will have to turn to “factors” to get loans.  These loaners will usually work with new companies to accommodate their financial needs.  They don’t lend the money directly to the company, but instead they buy a percentage of the company’s receivables up front at a discounted rate.  The discount is due to their service fee.

Most new businesses will find that factoring is a great option for them.  There is even a great association out there that helps to match businesses with factors that will be willing to work with them.

Another option is the angel investor.  Instead of trying to target financial institutions and banks, why not look for investors that have experience dealing with start up companies.  Sure, the financial terminology can prove to be tricky, but it is essential that you learn it before you start looking for financial help with your business.  You can quickly lose your credibility if you don’t sound professional.