Factoring Financing Articles

The last decade has been a boom for security agencies. As the security consciousness of the nation has increased, so has the demand for companies that provide security personnel. Private security guards are now guarding airports, large companies, infrastructure concerns and many public places. In summary, these have been financially rewarding times for companies in this business.

At the same time, managing growth has been very challenging for the company owners. Security guard agencies have heavy payroll responsibilities. They must be able to pay their guards on time, every time. The problem is that most of their commercial clients pay their invoices in net 30 to net 60 days. The problem is simple, owners have to meet weekly (or bi-weekly) payroll, but clients pay in 30 to 60 days. So, unless the company has a substantial cash reserve to handle payroll in the interim, it will run into problems. The solution is to get business financing.

For small businesses, getting business financing is easier said than done. Getting a business loan is very difficult in this environment. And anyways, business loans are not necessarily the solution to this problem. Why? Generally, business loans are best suited for buying assets and then paying them down over a number of years. A better solution, and one that eliminates the payment timing problem, is to get and advance against your invoices. This provides the funds you need to cover payroll and operate your business.

How do you get an advance on your invoices? There is a product called invoice factoring that does just that. It provides advances in your slow paying invoices. The proposition is simple. The factoring company advances you funds against your invoices and then gets paid once your client pays the invoice. What separates factoring companies from other solutions is that they provide funding against the business credit of your client. This means that a small company (or a startup) can usually get funded based on the strength of their client. Although the credit worthiness of your client is the most important requirement, it’s not the only one. To qualify for factoring, your company must have not liens, judgments and have owners with a good track record.

Running a staffing agency requires a combination of good sales skills along with solid organizational skills. As an owner (or manager) you need to make sure that you are signing on new clients who will use your staff. At the same time, you need to recruit quality staff that will ensure that you meet your client’s expectations. And while you do this, you also need to make sure that payroll is handled so that your team is always paid on time.

For many staffing agency owners, this last point can be a real problem, especially if the company is starting up or growing too quickly. Most commercial clients will be happy to use your staff for a contract, but they will pay their invoices in 45 to 60 days. In the meantime, your company needs to cover all employee payroll. You have to pay salaries, retain taxes and cover any benefits you offer. Many agencies just can’t afford to wait that long to get paid.

Most agency owners will opt for a line of credit, if they can qualify for this form of business financing. But qualifying for a line of credit, or a business loan for that matter, can be very difficult. This is especially true for staffing agencies that have no hard collateral. As it’s well known, most institutions provide business loans to companies that have both, the earning ability to pay the loan back and enough collateral to cover the loan if they can’t pay it back. Because of this, only staffing agencies with good track records, solid customers and seasoned management teams get institutional financing.

Unless you manage to get external funding, your staffing agency’s growth will always be limited by your capital. However, there is one funding alternative that will help solve your problem. If you look at the situation, you’ll see that the problem is one of timing. You need to pay employees now, but your clients want to pay later. And the way to bridge this gap is to get an advance on your client invoice. This provides you with the funds to meet your current obligations and handle new projects.

This solution is called invoice factoring and is offered by factoring companies. A factoring company considers your accounts receivable (invoices) from good clients to great collateral. Because of that, they are willing to advance you funds against those invoices. One advantage of factoring is that it helps you meet your current liabilities. A bigger – and often ignored – advantage is that it can help your company to bid for bigger contracts. How is that? Many staffing agencies have been able to win very large contracts and then arranged to factor their invoices before their payroll is due. The potential of this strategy is obvious. When done correctly – and it does take good organizational skills – it can help grow your company very quickly. Because of this, accounts receivable factoring can be a great tool for staffing agencies with good growth potential.

The logistics and transportation industry plays an important role as the backbone of the economy. Even in recessionary times, many companies in this industry can do very well if managed properly. One of the main challenges of transportation though is that it can be very cash intensive. Trucking and logistics companies have to pay for drivers, trucks, repairs and fuel. All of these expenses tend to add up very quickly. To complicate matters, most shippers will pay their invoices in 30 to 60 days. This creates a cash flow problem for many companies since they have immediate expenses but a delayed income.

If the company has a big enough capital reserve, this cash flow gap is not a problem. This is seldom the case though and most transportation companies try to get business financing to help them grow. Although business loans and other forms of financing are available to large companies, small companies don’t usually qualify for these products.

One alternative solution to this problem that works very well is freight bill factoring. Basically, it eliminates the payment wait and provides you with the funding to pay your business expenses as you incur them. This gives you the necessary breathing room to pay expenses while you are waiting for your clients to pay their invoices.

Transportation factoring is that is relatively easy to obtain – partly because of how the transaction is structured. Most factoring companies don’t lend money per se. Rather they buy your invoice at a small discount, providing an upfront payment. You usually get around 90% (this varies) upfront, and the reminder 10% (less the discount) once your client pays. Since the transaction is structured as a purchase rather than a business loan, the criteria for qualifying are different. For example, since the factoring company is actually buying your invoices from you, their biggest concern is the credit worthiness of your client. This means that small companies with a good list of clients can usually get this form of business financing.

The cost of freight bill factoring is usually based on the credit worthiness of your client, the length of time that the invoice is outstanding and your monthly sales volume. Obviously, companies with really good clients, high volumes and shorter invoice outstanding times will have lower costs.

Selling products and services to the US government can be a very profitable enterprise. The US government can be one of the best customers your business can get. They buy almost any product and service that exists. By law, they are structured to help small business owners succeed. And, unlike most commercial customers, they pay their invoices quickly. If you work with government projects you know that you need to treat this customer very well and be sure that you always deliver what you promised – on time and at the right cost.

So, what happens if you bid for a government contract, win it, and realize that you don’t have the capital to deliver? One alternative is to try and go to an institution to get business financing. Many institutions will provide a business loan (or similar financing) to government contractors. But as you know, qualifying for business loans can be very difficult, especially for startups. Institutions will review your business plan, along with your company’s financial statements, management team and track record. Because of this, many startup companies find that obtaining financing can be very challenging.

This problem is particularly challenging for product re-sellers. Most product re-sellers that work with the government need to pay their suppliers before they get paid by the government. Because of this, they can only compete for certain bids since their capital limits the size of the projects that they can pursue. Some resellers are able to negotiate better terms with their suppliers, basically enabling them to wait until the government pays them first.

There are two other alternatives that can help you grow. They are invoice factoring and purchase order financing. Both are alternative sources of financing and can be ideal for government suppliers.

Let’s looks at two examples to see how invoice factoring and purchase order financing can help your company grow. Let’s say that you have a government purchase order that you have completed and will get paid in 30 days. Let’s also say that your supplier needs to be paid in 10 days. The problem could easily be fixed if you could get an advance payment on your government invoice. That is exactly what accounts receivable factoring can do for you. It provides you with an advance on your invoice that enables you to pay your supplier on time. This enables you to maximize the use of your supplier’s payment terms to your advantage, helping you grow your company.

Now let’s look at a more complex problem. Let’s assume that you won a government contract that is substantial and you have a supplier that is demanding an advance payment before shipping the goods. This situation is very common for startups because few of them have any type of supplier credit. In this case, the solution is to use po financing. PO funding helps you pay your supplier so that the government order can be fulfilled. The transaction is then settled once the government receives the goods and pays for them.

Both receivables factoring and po funding are available to both new companies and established companies. Both are relatively easy to obtain and can be set up relatively quickly. This makes it an ideal solution for growing companies.