University:
Boston University
Course:
ENG ME 305 | Mechanics of Materials
Academic year:

2024
Views:

78

Pages:

18
Author:

Paluzzo0h2c

• • • • • • • • Types of Financing (that you may or may not have heard of) Non-Recurring Engineering Licensing Angel & FFF SBIR and STTR Revolving Line of Credit Leasing Factoring Bootstrapping Factoring (AKA Accounts Receivable Financing) • • Selling of a company's Accounts Receivable, at a discount, to a factor firm Accounts Receivable = money owed to company or outstanding invoices – Invoices = list of goods or services provided with sum of costs (i.e. a bill) • Cash advance worth majority of invoice that is paid within 24 hours of submitting • Post-advance, factor group chases debt and provides remaining amount owed by debtor minus a small fee for their service – Factor’s fee could be flat fee up front or variable fee with interest after a defined amount of time (most factor contracts last 30-90 days max) • e.g. 2% charge for first 30 days then additional 0.5% for every 15 days debt remains unpaid Factoring • Majority of contracts last 30-60-90 days, with rare exceptions for specific industries (e.g. government) – • On top of existing service fee (2-5% of invoice), factor might hold back a small percent of invoice (i.e. 10%) until debtor begins to pay invoice – • Factor firms specialize in certain industries, some will deny you before meeting based on how your business lines up If there are disputes or deductions about invoice, factor may keep a certain portion of this held back value Important that you believe that your debtors will be able to pay majority of invoice: factors are NOT debt collectors – Need to have good relationship with factor if you want to be able to use them again Factoring • Factoring firm can impose concentration limits based on concentration level – Defines how large of an invoice the firm can pursue from a SINGLE debtor CONCENTRATION LEVEL • INVOICE OWED TOTAL COMPANY ASSETS* 100% *CASH, MACHINERY, BUILDINGS, INVENTORY, ETC. Factors also check the credit limit of the debtors you are pursuing. If their credit limit is lower than your concentration limit, factor will chose the credit limit as the max amount of invoice pursuable under initial agreement – Majority of first time small business factoring will have credit limit How Factoring Works (Example) Case: Your manufacturing company is awaiting financing from outside investors to continue company growth but you need money NOW to keep the company afloat in the short term. You do not want to owe debt (i.e. from a bank loan) and decide to approach a factor to pursue your accounts receivable (in this case, $10k) from a trustworthy customer (debtor) of your company in order to obtain cash quickly. You then…. How Factoring Works (Example) Secure a contract with a factoring firm. The terms of the contract are: Current Balance $0 ● Cash advance worth 80% of your accounts receivable/invoice ($8000) ● Factor flat service fee of 3% of invoice ● Contract lasts 60 days. ● No credit limit or cash advance held back How Factoring Works (Example) 2. Current Balance $8000 About 24 hours after you sign contract and invoice is verified, the factor firm provides you with $8000 (with slight wire fee) How Factoring Works (Example) 3. Current Balance $8000 Over the next 60 days, the factor firm pursues the accounts receivable from your customer/debtor and attempts to obtain this invoice. How Factoring Works (Example) 4.1 Current Balance $9700 Before the contract ends (within 60 days), the factor obtains you accounts receivable in full. The factor takes their 3% service fee from the total invoice ($300) and you receive the remainder ($1700) Your contract is now complete and you have received a total of $9700. OR... How Factoring Works (Example) 4.2 The factor is unable to obtain the full invoice within 60 days. The factor is only Current Balance able to receive $9000 of the $10,000 invoice $6700 requested from your debtor. Based on contract agreement, your company must now pay the missing $1000 to the factor (as well as their service fee). The contract is complete and you have received a net total of $6700. Appropriateness of Factoring • • • • DO USE Someone owes you money Liquidity problems Payroll for employees to keep company running Not able to attain traditional financing DON’T USE • Accounts receivable not easily collected and/or easily valued • If your company’s profit margins are too narrow • If the debtor being pursued is not trustworthy • • • • • • • • Types of Financing (that you may or may not have heard of) Non-Recurring Engineering Licensing Angel & FFF SBIR and STTR Revolving Line of Credit Leasing Factoring Bootstrapping What is Bootstrapping? “Pull yourself up by your bootstraps!” Bootstrapping is less of a financing technique than it is a state of mind of how to create value from nothing. An entrepreneur (such as yourself) starts a company with little to no outside capital, choosing instead to rely solely on their existing savings, connections, and hard work to get things rolling Bootstrapping is an exercise in being aware of your environment and knowing how to take advantage of friendly coincidences Why Bootstrap? Necessity • Many entrepreneurs use bootstrapping to finance their startups simply because they have no other choice. – Limited starting capital, collateral, or credit, lack of cash flow to service a debt You’re in control • You have full ownership over your business and can dictate exactly what steps will be taken (this can be a pro and a con) • Performance metrics can be yours alone (you are your own boss) • Your original business objectives remain intact as long as you allow it Sense of accomplishment • You did it yourself, you get all the glory (if things work out) And Finally….. Venture Capital (VC) • Private equity investment (funding in return for stock ownership) for fast growing and risky ventures where no other capital market exists – Offer millions in funding to startups – VCs lend their experience and connections to their companies • Usually come in form of firms who invest capital given to them by larger institutions (pension funds, endowments, etc.) – Look for growth and return on investment/ownership. Fund often requires 20-35% annual rate of return on investment – Most funds have 10 year life cycle • VC investment typically last until the company they invested in goes public, is acquired by another company, or is shut down4 Caveats of Venture Capital • More than 2/3rds of VC-backed startups fail – When you fail, all the company’s assets are used to pay off holders of stock in your company (i.e. VC firms) – Their equity is your debt for their investment • VC funding is very scarce and hard to obtain – Process of courting a VC is very time consuming and may distract from the success of your business • The VC’s objective is financial - they owe their investors a return on their investment. The usefulness of your idea is secondary to their objective

Technology Development - Factoring

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