An interview with Steven Uster - Co-Founder and CEO of FundThrough
Securing funding for a new business is notoriously challenging, but the complexity in financing options doesn’t stop when you graduate beyond startup status. In fact, ongoing funding is critical to the growth of any business. As you grow, you’ll gain access to a variety of financing options, but navigating your choices can be tricky. This is particularly true when you look beyond traditional banking institutions and start looking at the myriad of options available in private, angel, venture capital, and other types of lending.
Whether you’re just getting your business off the ground, developing a new offering, increasing the size of your team or even expanding into an international market, it can be challenging to determine the best financing option for your unique needs.
In this column, we consulted with Steven Uster, Co-Founder and CEO of FundThrough, about the best ways to fund your business at each stage of growth. FundThrough is a trusted member of the Cortex network and advances millions of dollars to Suppliers across North America who are waiting on payments. We asked Steven a series of questions and hope that his insight can help take the confusion out of financing for you, no matter the phase your business is at.
- Financing options for startup businesses
Steven, what is a startup business?
In general, a startup is a young or brand new company, typically with 1 to 3 founders and a limited amount of funding. These tend to be high growth companies with 50 employees or fewer. According to one poll, about 34% of startups are bootstrapped, which means the founders launch the company with their own money. The remaining 66% of startups seek external funding.
Startups face greater financing challenges than any other group, and it’s simply because lenders are taking a risk in providing funding.
Why is it so challenging for startups to get funded?
Seeking funding can be difficult. If you’re struggling you’re not alone, as 58% of business owners with young businesses (0-2 years old) report difficulty in accessing debt financing. Startups simply lack the business history and credit record banks and other lenders want to see. You’ll find that banks want to offer loans to companies that have been in business for at least 2-5 years and have sales records in the realm of $500k to $1 million.
Even the companies who manage to bootstrap in their first couple of years often come to a point where they realize, If we’re going to grow this thing, we’re going to need more capital. So, realize first that when we’re talking about funding startups, it’s not just in that initial phase of getting your company off the ground. A lot of times, startups need funding one or two years in, to give them that push beyond a plateau and into the realm of stability and longevity.
What financing options are out there for startups?
If there’s just one piece of funding advice I can give startups, it’s this:
Always, always, always make sure you understand the total cost of funding and don’t settle for an option that takes more than you can afford.
This could be a financial consideration such as saying no to a private lender who’s offering a 16% interest loan, even though the bank turned you down. You might be able to get a term loan at this stage, but it probably won’t have the best rates or terms.
But it could also mean opting to pass on a funding offer if the fees are going to take too big a chunk out of your operating budget or profits. Equity financing can be easier to obtain than a bank loan for small businesses, for example, but it dilutes your ownership of your own company. That could be a very costly decision down the road.
Another option is invoice discounting, where a company buys your accounts receivables for 80-90% of their value and you are responsible for returning the full invoice value to them when you receive payment. This gives you instant access to cash flow, but it comes at a large cost (with no guarantee of prompt payment).
The best funding options give you the requisite cash injection without creating long term debt, robbing you of ownership, or hampering your ability to run your business your way. This is why the world of financial technology is growing so quickly and is intriguing to so many entrepreneurs.
A lot of our clients work in the oil and gas industry. What option do you recommend for them?
FundThrough has invoice factoring options that improve on traditional methods of invoice discounting, giving the business owner more control. Our clients can advance 100% of the funds on any invoice, minus small fees. We do the waiting for you; your customer pays us whenever they had agreed to pay - 60, 90, or 120 days later. This gives our clients immediate cash with no follow-up payments, interest, or fee accrual.
Industries like oil & gas, construction and other types of contracting find invoice factoring attractive for a couple of reasons:
- You don’t have to go through a pitch or business plan presentation or even a credit check. Your funding limit is based on your invoices and the strength of the companies you do business with.
- Because it’s based on money you’ve already earned, you aren’t creating new debt.
- Everything happens online inside a secure, user-friendly dashboard. Account creation takes just a few minutes, your initial funding limit is established in a few days and usually, funding an invoice means cash deposited in your bank account in one business day or less.
- Financing options for growing businesses
What about when your company passes the start-up stage?
Some find it surprising, but this is where a lot of companies really struggle. They’re growing, possibly expanding into new operating areas and investing in new equipment or capital expenditures. You have to be really careful at this stage not to cut too deep into your operating capital as you’re making these investments.
The everyday credit card can be a great way to access capital, especially if you have stable enough cash flow to pay it off in full every month. This helps your company build credit, as well.
A merchant cash advance will give your business instant access to capital, but it’ll require that you give up a percentage of future credit or debit sales.
Debt financing is a terrific option for this stage of business, and it’s unfortunate that debt has such a bad rap. We wrote a blog post not long ago about the stigma surrounding debt financing. Entrepreneurs tend to see VC funding portrayed as this attractive option. Debt financing, meanwhile, is referred to as a “lifeline.” But at this point, growing businesses are likely a contender for term loans at more favorable rates than would have been offered as a startup. You can probably get a true bank loan at this stage without a co-signor or having to put up collateral, and your cash flow should be steady enough for you to manage the monthly payments. This can be a great way to grow your business.
And naturally, factoring remains an incredible option throughout - it is particularly effective for companies who are trying to scale or grow. FundThrough’s invoice factoring product grows with a business. Our integration with Cortex means automatic periodic evaluations of your account, so your funding limit grows as your business does.
Our mid-sized company clients use invoice factoring in a lot of different ways, as well. Some use it to cover occasional gaps in cash flow caused by slow/late payments, sort of like a ‘cash flow safety net’. Some use their invoice factoring as extra working capital when they want to bid confidently on projects that they don’t have immediate resources for. Others use it as an alternative to creating new debt with longer term loans when they need to fund equipment purchases or expand their inventory so they can supply larger orders. We have some amazing stories from clients who have reached new milestones by making timely use of their factored funds. Having capital to invest in expansion isn’t a given for small businesses.
- Financing options for large companies
Large companies with more than 100 employees must have a lot of financing options. How can they determine which option is the most attractive?
Good question. So let’s say you have a strong, stable financial record with an established customer base and some serious assets on the balance sheet. Your demands on payroll, suppliers and cash flow are now in the millions.
These types of businesses will have access to ALL of the financing opportunities available above.
Lines of credit and banks loans will be easier to secure at this point for the large cash influxes needed to grow a business.
Factoring products like FundThrough now fill a specific purpose by giving owners a reliable short term tool for solving the cash flow problems associated with waiting on invoice payment terms. We’ve seen payment terms of up to a year for some large companies! Obviously, you still have people to pay and other financial obligations to meet in the meantime.
Whether you're just getting started and need help creating a cash flow statement, or looking for some tips to make it easier, check out FundThrough's Cash Flow Guide. If you're interested in learning more about managing cash flow or to get started, click here!