A service oriented company’s primary expense is payroll and expenses related to this, such as insurance and worker’s compensation. This is the case for most staffing companies as well other service oriented companies such as security guard, information technology, pest control, management consulting, and janitorial companies.  Invoice factoring and other types of accounts receivable finance are particularly well suited for these types of companies to finance their business. There are key characteristics of this financing that make it appealing for these businesses and include many practical options.  Below we have listed some of these.

Speed to Obtain Financing. Lines of credit can be put into place as quickly as a week and larger multi-million dollar lines can be in place in as little as two or three weeks. This is compared to other types of funding that take at least a month or longer. Timing is critical for service oriented types of businesses because many times they are experiencing rapid growth from winning a single large project and they need payroll funding quickly.

90% Advance Rates. The margins on many of these businesses are squeezed and higher advance rates are needed to cover payroll and other expenses. Other forms of lines of credit may be available but typically advance a much lower percent of the outstanding accounts receivable than does invoice factoring.

Funding That Can Grow Rapidly. As projects are added, the invoice factoring line grows in size and can provide higher advance rates. Other traditional forms of credit typically are capped at a certain amount until there is substantial history (often a year or more).

Over-advances. In some cases there are startup expenses for projects needed to be paid before the project has any related accounts receivable. With overadvancing, money is used to pay these expenses. An example is inital payroll before first invoice is issued, another is a need to purchase and uniforms or equipment at the beginning of a project.

Industry Knowledge. Speed, flexibility, and industry knowledge are key to invoice factoring in being responsive to their client’s rapidly changing needs in the service oriented industries.

In summary, when invoice factoring is put into place correctly, it is a key enabler for payroll funding and other expenses of service oriented companies.  This helps to ensure the success of these companies and allows them to grow rapidly and profitably.

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A major expense for IT companies is personnel.  Many small businesses don’t have sufficient working capital to cover the payroll or contractor expenses. These expenses are due typically weekly or every other week while payment of invoices doesn’t happen for at least a month, many times much longer.  The result is that the size of the contracts and the number of contracts that an IT provider can take on is limited.

Government contracts are very popular these days because of the economy.  Government contracts can be large and they can span  several months.  Because of this, the cash flow required can be large and small businesses are limited or totally locked out of pursuing other contract opportunities.  In many cases, a small business IT provider will subcontract to a larger prime government contractor such as Raytheon, Lockheed Martin, or Boeing.  In this case, the small business is still limited because their cash flow can be tied up by both the government and the prime contractor.

Traditional sources of funding just aren’t responsive these days to the needs of small businesses.  The requirements to get funding have gone up tremendously and many small businesses are locked out from this source of funding.  Even mature small businesses find that their working capital is tied up in other projects and they have to turn down business that they could do otherwise.

There are readily available sources of financing for small IT providers on government contracts.  Government contract factoring can be the financing solution that is the difference between having to turn down a contract and their pursuing a profitable opportunity.  Government contract factoring is factoring focused on contracts at any level of government.   Most levels of government have processes in place that make it easy for alternative financing firms to provide lines of credit for small businesses providing products or services to the government entity.  These are based on the size of the billing to the government so the line of credit is uncapped and will work with any size project no matter how large it is.

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Companies can get very creative with ways they use invoice factoring. One particular landscaping company we work with provides snow plowing services during the winter months. They obtain contracts with shopping malls, banks, office complexes, and various municipalities. Since they are a small company doing work in the spring, summer and fall, they do not have the capital, resources and manpower for the snow removal contracts in the winter. Therefore, they subcontract the work to various contractors that own one to three plow trucks. The landscaping company’s customer was taking 30-60 days to pay for the services but the landscaping company was unable to pay their subcontractors faster than that. Unfortunately, a lot of the subcontractors could not wait that long to be paid and had to turn down the work.

They resolved the issue by utilizing invoice factoring. The landscaping company gave their contractors a choice – they could wait until they got paid to be paid or they could be paid immediately with a 5% discount. Since most contractors have expenses such as gas and payroll, most of them opt to be paid immediately. The fee they were charged covered the factoring fees the landscaper incurred. This enabled him to take on new contracts since he had so many more contractors willing to work with him. Additionally, there was no long term commitment involved so the landscaping company didn’t have to involve factoring with their spring, summer, and fall business after the snow season.

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A recent article in the New York Times titled: “When Banks Won’t Lend, There are Alternatives…”, by Ian Mount states that “The days of yesteryear when you could go to your corner bank are over” and “Small, emerging, growing businesses have few traditional sources to turn to.  You have to get a little creative”. One of the types of financing highlighted in this article is  Asset-Based Lending, a broad term which include accounts receivable factoring.  This type of financing is based on a company’s selling their receivables, or invoices, to a factoring company, which gives the company selling their invoices funds immediately. Most of our clients use this type of financing as a means to finance short to medium term financial needs: finance new projects, providing funds when customers are paying slower and suppliers are demanding earlier payments, etc.  They are using this financing for interim purposes until they can move to more traditional funding.  We work with them to make sure that they are able to profitably utilize this short to medium term financing solution.

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