Running a construction company that installs underground utilities or over ground cables can be very profitable. Most of the times, the clients are top rates companies such as major utilities or cable operators. Although profitable, keeping enough working capital to meet payroll and other obligations can be challenging. Especially since cable companies and utilities tend to pay their invoices in 30 to 65 days. Few cable installers can wait that long to get paid. For starters, they need to meet payroll which is usually weekly or bi-weekly. Then, there are also suppliers that need to get paid.

Is getting a business loan solution? Not always. First, getting business loans is particularly difficult in the current banking and credit environment. Second, although small business loans can be a great tool for business financing, they are not always the best solution to a problem. Let’s examine the situation in more detail.

Most cable installers, especially startups or rapidly growing companies, run into the following situation. They get a lucrative contract to perform a job that stipulates that the installer can bill regularly, usually weekly, based on the length of installed cable. Now at the end of the week, the installer can bill the client but will also need to pay all of his employees. However, payment from the client will not come until the following month, so he will need to pay employees out of savings. Unless your business has a substantial bank account, sooner or later you will start turning projects down or you will run out of money.

But what would happen if your clients paid you in 2 days, rather than 2 months? Then you would not have these problems. You’d be able to run your business efficiently and grow it when new opportunities come by. Although you cannot make your clients pay sooner, you can achieve the same results by using construction factoring.

Accounts receivable factoring provides a very simple proposition. As soon as the work is completed, you can sell the invoice to a factoring company. The factoring company buys your invoices in two installments. The first installment, called the advance, will cover about 80% of the invoice’s amount. The second installment, paid to you once the client pays for the service, covers the remaining 20% (less a small fee). A small fee is subtracted from the second installment to cover for the cost of the service.

One of the advantages of working with factoring companies is that construction factoring is much easier to obtain than conventional financing. Furthermore, the size of your financing line is tied directly to your sales and therefore grows with your business. This makes it an ideal solution for small and growing businesses.

For product distributors, cash flow is always a big concern. Unless you have been in business for a long time, most suppliers will insist that you pay them soon after delivering the goods. Or worse, prior to delivery. However, most of your clients will insist in paying your invoices on net 30 or net 60 days. This creates a simple problem – you have to pay suppliers quickly, but clients pay slowly. Although your business may be profitable, unless you have adequate working capital, you will have cash flow problems.

When faced with a cash flow problem, most business owners try to get a business loan. Although business loans can work well in many situations, they can be inflexible especially if your business has growing capital needs. Also, qualifying for a business loan can be difficult since institutions usually require substantial collateral and track records showing profitable operations for many years. This makes them a tough option for new or small businesses.

But there are better solutions though. Let’s examine the situation. The problem is the time delay between having to pay your supplier and getting paid by your client. What would happen if you could reduce the time delay? For example, let’s say that your client paid you in two business days rather than two months. Would that solve your cash flow problem? For most, it would.

You can achieve just that by using invoice factoring.

The value proposition of invoice factoring is simple. It reduces the time delay between delivering goods and getting paid. This puts your business in a better cash position and enables you to take on new opportunities.

Factoring involves selling your invoices to a factoring company. The factoring company buys your invoices in two installments. In the first installment, you get 80% of the invoice advanced to you. You get the remaining 20% (less a fee) as a second installment, once your client actually pays for the goods.

One of the advantages of factoring accounts receivable is that is a very flexible solution, where the maximum amount you can finance is mostly determined by the ability of your clients to pay your invoices. Said differently, your factoring financing line is tied to your sales and grows with your sales. Because of this, small companies that do business with large credit worthy clients can benefit from using factoring.