What's Below in Issue #48:

📰 - An overview of Venture Factoring loans

📊 - Data behind longer periods between raises

🎙️- Podcast w/ Julia Pimsleur

🆓- Free startup resources

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Venture Factoring Loans: A Cash Flow Solution

This is our last issue on types of venture debt, which we have been focusing on for the last few weeks. The least understood type of debt is often factoring loans, In this newsletter, we will focus on the basics of venture factoring loans, their benefits and drawbacks, and when you should consider using them.

What are venture factoring loans?

Venture factoring loans are a type of debt financing based on your accounts receivable, which are the invoices you send to your customers for the goods or services you provide. Venture factoring loans are usually provided by specialized lenders, such as factoring companies, banks, or online platforms, that have experience and expertise in working with startups.

Venture factoring loans are also known as invoice financing, invoice discounting, or receivables financing. The process works as follows:

• You sell your invoices to the lender at a discount, usually between 70% to 90% of their face value.
• The lender pays you the discounted amount upfront, minus a fee, which is usually a percentage of the invoice value or a flat rate per invoice.
• The lender collects the full amount from your customers when the invoices are due, usually within 30 to 90 days.
• The lender pays you the remaining balance minus another fee, which is usually a percentage of the invoice value or a flat rate per invoice.

Why are venture factoring loans useful?

Venture factoring loans have several advantages for both founders and lenders. Here are some of them:

• They improve your cash flow: Venture factoring loans can help you get immediate cash for your invoices, instead of waiting for your customers to pay you. This can help you cover your operational expenses, such as payroll, rent, or inventory, and invest in your growth, such as marketing, product development, or hiring.
• They are easier and faster than equity financing: Raising equity financing requires a lot of time and effort to negotiate the valuation and terms of the deal. With venture factoring loans, you can skip this process and get money quickly and easily. You also save on legal fees and dilution costs.
• They do not require collateral or personal guarantees: Unlike other forms of debt financing, venture factoring loans do not require you to pledge any assets or personal guarantees as security. The lender relies on the quality and creditworthiness of your customers, not your own. This reduces your risk and liability in case of default.
• They do not affect your credit score or debt-to-equity ratio: Venture factoring loans are not reported to credit bureaus or reflected in your financial statements as debt. They are considered as a sale of assets, not a loan. This means that they do not affect your credit score or debt-to-equity ratio, which are important indicators of your financial health and attractiveness to investors.

When should you use venture factoring loans?

Venture factoring loans are not suitable for every startup or every situation. Here are some scenarios where you should consider using them:

• You have a high volume of invoices from creditworthy customers: Venture factoring loans are ideal for startups that have a large number of invoices from customers that have a good reputation and payment history. The more invoices you have, the more cash you can get. The more creditworthy your customers are, the lower the fees and the higher the advance rate you can get.
• You have long payment terms or slow-paying customers: Venture factoring loans can help you bridge the gap between when you deliver your goods or services and when you get paid by your customers. If your customers have long payment terms, such as 60 or 90 days, or if they are slow to pay, such as 30 or 45 days past due, venture factoring loans can provide you with immediate cash flow and reduce your collection risk.
• You need flexible and scalable financing: Venture factoring loans are flexible and scalable, meaning that you can choose which invoices to sell and how often to sell them. You can also increase or decrease the amount of financing you need based on your sales volume and cash flow needs. You do not have to commit to a fixed repayment schedule or a minimum or maximum amount of financing.

How does the math behind venture factoring loans work?

To illustrate how venture factoring loans work in practice, let's look at an example:

Suppose you are raising $100,000 in cash financing for your startup. You have two options:

• Option A is to sell 10% of your company for $100,000 in equity financing;
• Option B is to take a $100,000 in venture factoring loan with an advance rate of 80%, a discount rate of 3%, and a service fee of 1%.

Let's assume that you have $125,000 worth of invoices from your customers, with an average payment term of 30 days. How much money will you get from each option?

• In Option A, you will get $100,000 upfront, but you will have to give up 10% of your company. Your equity stake will be diluted from 100% to 90%, and your investors will own 10% of your company.
• In Option B, you will sell your invoices to the lender at a discount of 3%, which means you will get 97% of their face value. The lender will also pay you 80% of the discounted amount upfront, and the remaining 20% when the invoices are collected, minus a service fee of 1%. The calculation is as follows:
  • The discounted amount of your invoices is $125,000 x 0.97 = $121,250.
  • The upfront amount that you get is $121,250 x 0.8 = $97,000.
  • The balance amount that you get when the invoices are collected is ($121,250 x 0.2) - ($121,250 x 0.01) = $22,750.
  • The total amount that you get is $97,000 + $22,750 = $119,750.

As you can see, in Option B, you end up getting more money than in Option A, and you do not have to give up any equity in your company. However, you also have to pay fees to the lender, and you have to rely on your customers to pay their invoices on time.

Of course, this example is simplified and does not take into account other factors that may affect the outcome, such as taxes, fees, or multiple rounds of funding. However, it illustrates the basic logic and math behind venture factoring loans.

Venture factoring loans are a cash-flow solution for your startup if you want to improve your liquidity and fund your growth without giving up ownership in your company. They can help you get immediate cash for your invoices instead of waiting for your customers to pay you. They are also easier and faster than equity financing and do not require collateral or personal guarantees. However, they also come with some risks and trade-offs, such as paying fees, losing control over your invoices, and depending on your customer's creditworthiness. Therefore, you should carefully weigh the pros and cons of venture factoring loans before deciding whether to use them or not.

Relevant Articles to Raising from Venture Debt

• Venture Capital Funding: Essential Things to Know About Venture Debt - 👉 The Motley Fool

• Understanding Venture Debt Financing - 👉 SVB

• Venture Debt: Benefits & How To Pick A Lender - 👉 Saratoga

Data Corner

Focus on Runway

The days of continuously fundraising rounds quickly after each other are over. The amount of time between rounds is rising with VCs focusing on clear milestones since the previous round. This makes having a clear runway for 2+ years between rounds incredibly important since running out of cash is the easiest way to kill a startup.

To address this, founders should ensure they are raising enough cash to last extended periods when they will need to meet measurable milestones. Additionally, promising milestones that are too large for the timeframe can hurt future rounds more now that VCs are paying more attention.

Fundraising Demystified Episode #23 is Live!

This week on the #FundraisingDemystified podcast, we are joined by Julia Pimsleur, the founder and CEO of Million Dollar Woman. Julia sheds light on the disparities between how men and women navigate the terrain of fundraising and finance discussions.  She champions a shift in our culture that encourages and normalizes women’s active participation in investment conversations. Her empowering message is sure to resonate with entrepreneurs everywhere, highlighting the importance of relatability in women-led ventures.

Let us dive into three key takeaways from this episode that you definitely shouldn’t overlook:

1. Mindset Upgrade: Discover how Julia overcame limiting beliefs and upgraded her mindset when she decided to raise venture capital. Learn the importance of believing in yourself and your business even in the face of challenges. A positive mindset can truly make all the difference in achieving your entrepreneurial goals.
2. Friend Raising, Not Fundraising: Julia emphasizes the value of building genuine connections and relationships when raising capital. By approaching fundraising as "friend-raising," you can establish long-term partnerships and support, even if immediate funding isn't secured. Building strong connections can be just as vital as pitch presentations.
3. Learn the Game: Julia advises women entrepreneurs to learn the ins and outs of the fundraising game before diving in. Discover the importance of studying, seeking mentors, and understanding the expectations of angel investors and venture capitalists. With preparation and knowledge, you can make a compelling case for your business and increase your chances of securing the funding you need. Listen Here

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Let's stay in touch:

Written by Jason Kirby - https://www.linkedin.com/in/jasonrkirby
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