Advertising Startups + Invoice Factoring: A Perfect Match

Long industry payment terms can be defeated.

Startups and small businesses, especially those with limited operating history or profitability, often find it difficult to secure bank loans.  Banks hesitate to lend money to businesses that don’t have income or assets that meet their strict underwriting criteria.  They want proof that the business model is viable and require borrowers to be in business for a certain number of years before being eligible for a loan.  Because of this, a startup often has limited options when cash flow issues emerge.

This problem is compounded for businesses with advertising-based revenue models (agencies, publishers, adtech companies, etc) where standard brand payment terms are frequently 90+ days.

Often, these companies work with vendors who expect payment within 30 days of completed work.  Additionally, accounts receivable collateral in the digital advertising space is not well understood by banks and other lenders.  It’s a symptom of digital advertising’s relative newness as an industry, the seeming complexity of the ecosystem to outsiders, and the lack of physical collateral.

So how do early stage advertising companies grow with built-in working capital issues and no bank financing options?  Simple – these companies turn to invoice factoring.  Factoring is the selling of invoices to a factoring company (like Harper Partners) in exchange for immediate cash.  This is an excellent way for a small business to fund growth and operations without interruption.

Invoice Factoring for Advertising Startups

Invoices are assets you can use to fund your startup’s growth.

Factoring invoices is particularly advantageous for advertising startups for several reasons.  By selling slow paid invoices, a company raises capital without selling additional equity, which reduces dilution for the founders.  For venture-backed companies, factoring increases their cash runway, delaying when the next funding is needed and giving them time to grow into a higher valuation.  These startups immediately convert invoices to cash and use this capital to fund operations and growth.  The logic here is obvious – the longer a venture-backed company can extend its runway, the higher it can grow its revenue.  The higher it can grow revenue, the bigger the valuation the startup receives in the next investment round.  And, when the time comes to raise the next venture capital round, it’s always better to walk into the meeting not desperately needing cash – the ability to walk away is a powerful negotiation tactic!

The chart below highlights the cash balance of an actual Harper client – a growing advertising agency with 75 day average payment terms.  The agency partnered with Harper to use invoice factoring to fund operations while experiencing 3x revenue growth.  They maintained the cash flow needed to pay employees and vendors on time without raising additional equity.  Had they relied on their own cash flow while facing notoriously long industry payment terms, they would’ve come dangerously close to running out of cash.

Advertising Startups

Most businesses would prefer to raise funds without borrowing money.  This is another reason why factoring is a great option for smaller advertising businesses.  Factoring is not debt, it is the sale of receivables, and as such keeps your balance sheet financially stronger versus taking out a loan.  Debt is risky and carries with it restrictive covenants on how the funds can be spent.  When it can’t be paid back, assets will be repossessed and if the debt is large enough, the business may be driven to bankruptcy.

Factoring doesn’t pose these problems.  The money paid to the business selling their invoices is secured by those receivables.  The work has already been done and the business is only waiting to receive payment.  The funding company also takes no equity in the business, letting the owner retain complete control.

Another distinct advantage of factoring over traditional bank lending is speed to funding.  A bank will take at least several weeks and often months to fund your business.  That is almost always more time than a business owner has.  They need to pay their employees, vendors, and landlords.  These things cannot wait – you try stretching your employees on their paychecks!  Time is crucial for startups – they need to secure funds as soon as possible because the cash runway clock is ticking.  Factoring allows them to do so.  Once a credit line from a factoring company is set up, typically within 2-5 business days, the business can access funds each time in less than 24 hours.

After the credit line has been set up, the factoring process is simple.  A company will sell some or all their invoices to a factor company for up to 85% of their value up front.  For example, a $100,000 invoice will qualify for $85,000 advanced right away.  These funds can be used for whatever the business needs.  There are no covenants and restrictions on the use of funds as there would be when raising debt or equity.  The factor will then collect on the invoices from the startup’s customers.  In Harper‘s case, the client’s customer won’t be notified (the client’s name stays on the receiving bank account).  After the invoice has been paid, the remaining money ($15,000 in our example) is returned to the startup, minus the factor’s small fee.  It’s really that simple.


Schedule a complimentary consultation with Harper Partners today and find out why so many businesses with advertising receivables choose to work with us.  Our team of factoring experts will find the right solution for you – and that includes if you’re better served by one of our partner lenders!  Fill out your contact info here or call (310) 817-0376 to speak to a member of our team.