By reading the headline of this article one would assume that I will be expressing pearls of wisdom about how to become an instant success in the factoring industry.
It’s really easy, right?
All you need to do is to acquire some capital either through a bank or investor, fund some invoices and walk your way to fame and fortune.
Whether it’s a new factoring company or any startup, one of the easiest things to do is to create an excel spreadsheet with some basic assumptions and just double and triple income for the next few years. We recently had a recent startup visit our office looking for capital. Although they had been in business for less than a year I requested a set of projected financial statements including a profit and loss statement, balance sheet and a statement of cash flows. Although the information was only a projection, it gives you a good idea on how the management team thinks about the company’s future success. Despite having a great product with some reputable customers, they were still very new in their industry.
Unfortunately, like most new companies they had projected their growth to be over 400% in just two years.
Was this a little aggressive yes, realistic, not really.
The problem with over projecting your success without any empirical data is that you lose credibility with potential investors and lenders. It’s a difficult decision to make. You want to show how great your future company will be without sounding overly optimistic.
The same holds true with new factoring companies.
So often when I meet with new factors they have ideas about the industry they plan on marketing to along with some general statistics about the scope of that industry.
Next, a penetration factor of “x” percentage is multiplied against the overall targeted industry along with an assumed discount fee and you now have projected revenues.
Obviously this is a very simplistic model but you get the point.
When we first started our company the business plan had many lofty assumptions including only factoring one industry. Although we had done our research we never realized how tough it was to compete with well established factors offering deals at extremely low margins.
It didn’t take us too long to figure out that that we needed to quickly adjust our model and cast a wider net more suitable for our business model. After funding a few deals we then adjusted our plan even further to include more realistic data based on our experience.
So often I tell new companies that acquiring financing is like a slow climb up a ladder.
Take small steps first and put yourself in the lender’s shoes. Would you really want to lend large sums of money to a company with little or no experience or one with some experience and realistic goals?
The answer to that question may sound a little over simplistic but so too are many of the expectations we see from new companies.
Good luck and keep it real.
This article was written by our president Don D’Ambrosio and originally published in Factoring Investor on September 22, 2014.
Don D’Ambrosio is the president of Oxygen Funding, Inc., an invoice factoring company located in Lake Forest, California. Don has over 25 years experience working in the commercial and residential finance industries. He previously served as Controller of a commercial insurance agency and as Chief Financial Officer of a publicly traded mortgage company. He can be reached at 949-305-9300 or firstname.lastname@example.org.