Although the economy is recovering, the strength and duration of the recovery remain uncertain. Because of this, many companies are reluctant to hire permanent employees, opting instead to use a temporary staffing agency to fulfill their personnel needs.

The staffing industry has seen a considerable increase in their level of activity as companies start ramping up their production. Although this is very good for the industry, it also creates a cash flow problem. The employees that are hired by the agency need to be paid weekly (or every two weeks), but clients pay their invoices in 30 to 60 days. Therefore, staffing agencies need a financial cushion to handle these expenses until their clients pay. The demands on this financial cushion will increase if the agency lands a new contracts.

One easy way to fix this problem is to put more capital into the business – either directly or through investors. This can be complicated, and could involve giving up some equity in your company. Another alternative is to get business financing – either through a business loan or a line of credit. Both of these products can be hard to get as the company will need to show solid assets, an experienced management team and a well crafted business plan. The problem is that staffing agencies don’t have assets in the traditional sense of the word – there is little if any real estate, and no machinery or equipment. The assets are their employees, and those walk out the door every day. There is an alternative to conventional business loans that can work well in this situation – it’s called invoice factoring.

Invoice factoring provides an advance payment for the staffing agency’s accounts receivable. This reduces the time you wait to get paid from 45 days to just a few days. This reduces your reliance on a cash cushion and provides liquidity to meet your company’s expenses.

Also, invoice factoring is easier to get than conventional financing. Most factoring companies consider your invoices to be strong assets. Because of this, a factoring company will usually be willing to extend financing to small businesses that have potential and solid customers. This makes invoice factoring a very accessible form of financing.

Small businesses have been one of the biggest victims of the economic credit crunch. Some have seen their revenues go down. And almost everyone has seen their cash flow suffer. Clients that used to pay in 15 days are now paying in 30 or even 45 days. And those that used to pay in 45 days may now be paying in 60 days. The net effect of this is that cash flow weakens, and with it, the company’s ability to operate.

Although larger companies have sufficient reserves to wait for payments, few small companies do. And, due to the lack of credit, small companies usually need to pay their own bills sooner. This creates an unsustainable situation, where the end result is downsizing the company, if not closing it.

The most obvious way to solve this problem is to get a business loan. The problem, especially in today’s market, is that qualifying for business loans is very hard. Most institutions are being cautious, in part due to their own capital problems, and are only providing business financing to their prime customers. These are customers that have solid income statements, strong balance sheets and seasoned management teams. This also rules out a number of small and midsized business owners who also need the funding.

One alternative that is often overlooked is invoice factoring, a solution that is specifically designed to address slow payments from commercial clients. It helps by providing an advances for your slow paying invoices – this accelerates your cash flow enabling you to meet your obligations. You get immediate funds, while the factoring company who bought the invoice from you, waits to get paid. The transaction settles once your client actually pays the invoice. The factoring company charges you a small fee for the service.

The transaction is usually structured as a sale – where you sell your invoice to the factoring company. Because of this structure, factoring companies are more interested in the commercial credit of your clients than yours. This means that small to medium sized companies whose biggest asset is a list of solid customers can usually obtain factoring financing.

Finding the right type of business financing for your company can be a major challenge, especially in the current economic environment. Understandably so, institutions are behaving cautiously and only providing business loans to their prime clients. To qualify for a business loan, companies have to show that they have solid balance sheets, stable (or growing) income and an experienced management team. These requirements put small and medium sized companies in a competitive disadvantage since few will have the financial stability to qualify for financing, especially in today’s marketplace.

A business loan is not always the best solution to cash flow problems, especially if these are caused by slow paying clients. In most commercial transactions, clients have to pay their invoices in 15 to 30 days. However, most companies have been extending their payment terms to 45 or 60 days as a way to cope with the current credit crisis. Small businesses have been affected the most, because they can’t afford to wait 45 to 60 days to get paid. The need the funds immediately to fulfill their own obligations.

Factoring financing could be a good solution If the company’s biggest problem stems from cash flow and clients that take too long to pay. It is very different than a business loan. With factoring, a financial intermediary called a factoring company buys your invoices for an immediate payment. They wait for your client to pay the invoice and settle the transaction, while you get the benefits of the immediate funding. Most factoring companies will charge a fee for their services – usually a percentage based on the invoice.

One of the biggest advantages of working with a factoring company is the way the structure their transactions. Since they buy your invoices, their biggest concern is the credit quality of the company paying for the invoices. This allows you to leverage your client’s commercial credit and make it work to your advantage. Thanks to this structure, small companies that have a solid list of clients can usually qualify for this type of financing.

Factoring can be an ideal solution for companies that can’t afford to wait 60 days to get paid and that sell to solid commercial clients.

Most companies experience a cash flow shortage at one time or another. Unfortunately, thanks to toughening economic conditions, cash flow shortages are becoming common place. As a general rule, experts recommend that companies keep a cash cushion that is equivalent to six months worth of operating expenses available as cash in a bank account. The cash cushion can cover any variations in your cash flow and enables the company to operate efficiently.

There is a problem with this strategy, though. Few small companies can afford to have that much money tied in a bank account. Especially in the current economic environment. But without it, the company is exposed to serious problems if customers start paying late or if they face an unexpected expense.

One way to bridge any gaps in cash flow is to get business financing. Getting a business loan can be difficult and time consuming. Lending institutions have tightened their due diligence requirements and will only provide business loans to companies that have solid balance sheets, seasoned management teams and well developed growth plans. The problem with this is that few small companies have solid balance sheets. In this case, an alternative source of funding called invoice financing may be the right solution.

Invoice financing can reduce/eliminate the 30 to 60 day wait to get paid for your accounts receivable. It provides an advance payment for your invoices, smoothing out your cash flow and ensuring you are better prepared to meet your expenses and address new opportunities.

Financing your invoices is fairly simple. You work with an invoice financing company, who evaluates the quality of your account receivable and provides an advance based on those results. One important advantage of invoice financing is that the financing company considers the invoices to be strong collateral. Because of this, small companies with a solid list of clients can usually benefit from financing their invoices.