Undercapitalization

Every aspiring entrepreneur dreams of one day starting their own business. And while they might dream of the days when it grows to become a large empire, the reality is that the entrepreneur will have to start small. Starting at all is a feat as raising money can be a tall order. Bootstrapping is the only sure way to get the business up and running unless you are blessed with a wealthy family or an idea worthy of investor support. Either way, entrepreneurs are usually itching to get moving on the project and are prone to be overly optimistic about the capital requirements. This means that a lot of start ups are prone to ‘undercapitalization’ and as a result, may be doomed from the start.

Undercapitalization occurs when a business, either cannot secure the funds they are seeking or cannot afford their current operational expenses due to lack of capital. As for the former, funds are not currently easy to find as banks are timid to lend. This goes for all businesses including those with established business credit. So if the big guys cannot finance through banks, startups can forget about it. This exacerbates the latter form of undercapitalization defined above. This is why cash is king and start ups should be realistic in their financial planning.

However there is a little known financial tool that is perfect for startups that usually have no other avenues for financing. This tool is known as accounts receivables financing. Accounts receivables financing or ‘factoring’ solves undercapitalization two ways: it provides access to financing and it provides timely cash with which businesses can cover their operational expenses.

Factoring can also lower the capital requirements for a startup as it helps make the most of a business’s working capital. Factoring essentially makes it so you do not have to extend trade credit to your customers and thus keeps your business’s money working for your business. If you are looking to bootstrap your business, looking into factoring options is a must.