Factoring for technology companies is becoming more popular, because many technology entrepreneurs won’t allow the lack of working capital to prevent them from growing. They look to Alabama and feel that they can do just as well.
Alibaba, the Chinese ecommerce firm, has just debuted on Wall Street, and it was a whopper. The technology company raised $29.7 billion, which made it the largest IPO of all time. The previous record holder was Visa back in 2008, and it raised only $17.9 billion.
Alibaba achieved a market cap of more than $228 billion, and that has made it the 4th most valuable tech company in the world. The only companies ahead of it are Apple ($611 billion), Google ($400 billion), and Microsoft ($384 billion). Alibaba is now more valuable than Facebook.
With such a dramatic entrance, many other tech companies are dreaming of a big IPO payoff as well. Perhaps you too are dreaming of this, or maybe you just want to be moderately successful first. But whether you are aiming high or have more reasonable expectations, you will undoubtedly need capital and lots of it. If an IPO is not practical for you, then you need other arrangements.
This is perhaps the most obvious way of getting financing, but it has its share of drawbacks as well. The loan application process takes too much time, and even the chances of getting a loan is 50-50 at best. Banks require a lot of security, and for many tech companies the problem is that they may not have the assets to use as collateral.
And if you already have borrowed from a bank, you need to go through another long process if you want to get more money.
Here, you raise capital by selling chunks of your company to venture capitalists. But this can be very expensive in the long run. For example, if your company is worth a million dollars, you have to sell 10% of it to get $100,000 in capital. But when your efforts to grow your business succeed and now your company is worth $3 million, that 10% is now worth $300,000. You essentially paid $200,000 to get $100,000 for your working capital.
And if you sell a large chunk of your company, you may end up losing control of it in the end.
With factoring for technology companies, the benefits are quite significant. The application process is much quicker. The chances of getting finance are also quite good, because your credit is irrelevant to the factor. The most important consideration is that your customers are credit-worthy.
If they are, then the factor advances you anywhere from 70% to 85% of value of the invoices almost immediately. You then get the rest of your money (minus the fee of the factor) when your customers finally pay in full. You can then use this money to pay overhead and payroll, or invest in research or better equipment.
With factoring for technology companies, you can make sure that your company is still yours. You don’t have to explain to a bank about your overall business strategy, and you don’t have to risk losing control of your business.