Financing for Telecommunications Equipment Maintenance Companies

Summary: Telecommunications equipment maintenance companies often operate with tight cash flows. Their corporate and telecommunications clients provide regular projects but pay invoices in 30 to 60 days. Slow payments create cash flow problems for companies without an adequate cash reserve. Unfortunately, these problems can grow and threaten the viability of the business. The solution is to use financing to bridge the cash flow gap.

This article discusses how to improve your working capital by financing your accounts receivable. You will learn how this solution works and determine if receivables financing is right for you. We cover the following:

  1. Offering payment terms and cash flow
  2. Financing accounts receivable (factoring)
  3. Advantages of factoring
  4. Challenges
  5. Average costs
  6. Does your company qualify?

1. Payment terms and cash flow

Most telecommunications companies and corporate clients pay their vendors on 30- to 60-day payment terms. Having clients as net-30 accounts is typical when you work with large companies. You don’t have much choice as a vendor in a highly competitive market. You must offer payment terms.

Offering payment terms is not a problem for equipment maintenance companies with an adequate cash reserve. You can use the funds in the cash reserve to cover expenses and replenish it once the invoice pays.

Offering payment terms can create a financial problem for companies without enough cash in their reserve. This common problem often happens because the company is expanding and outgrows its cash reserves.

a) The simple solution

Many companies improve their cash flow by offering early payment discounts to their clients. These discounts can work well but are also unpredictable. In most cases, getting a revolving line of credit is the better solution.

Unfortunately, getting financing is difficult for small businesses. Most business lines of credit have stringent qualification requirements. Few small companies have the required assets or ability to comply with the lines’ covenants.

Companies that don’t qualify for a conventional line of credit can consider financing their accounts receivable. This solution provides many of the benefits of a line of credit but is easier to obtain.

2. Financing accounts receivable (factoring)

An accounts receivable factoring line lets you finance your invoices from qualified customers. It advances a percentage of your open invoices and provides liquidity to pay company expenses. The line behaves like a revolving line of financing.

Factoring transactions are not structured as loans. Instead, the factoring company buys your invoices and pays for them in two installments. The first installment is the advance and covers 75% to 85% of your accounts receivable. Your company gets the advance shortly after submitting invoices for financing.

The remaining 15% to 25% is rebated as a second installment once your customers pay their invoices. The financing fees are usually subtracted from the second installment.

Go deeper: Read “How Does Accounts Receivable Factoring Work?

3. Advantages of factoring

Factoring lines have advantages over other types of financing. For this reason, factoring has been gaining traction as a way to finance companies in many industries.

a) Improves cash flow quickly

The most important benefit of factoring your receivables is that your cash flow improves quickly. The line can provide funds to pay equipment vendors and other business expenses.

b) Allows you to offer net-30 terms

A receivable factoring line allows you to offer net-30 terms to clients while minimizing the risk of cash flow problems. You can always offer terms and finance the invoice once the work is completed.

c) Easy qualification

Factoring lines have easy qualification criteria. Most small equipment maintenance companies with a solid roster of customers and no encumbrances should be able to qualify.

d) Grows with your business

The line’s credit limit is determined by the credit quality of your customers and invoices. The line can grow as you expand your business. When used correctly, a receivables line can be used as a platform for growth.

4. Disadvantages of factoring

Accounts receivable factoring lines have some disadvantages. These must be evaluated carefully to determine if it’s the right solution for the financial challenge you face.

a) Only solves a specific problem

One important limitation of factoring is that it only helps companies with cash flow problems due to slow-paying invoices. Factoring is of little help if your company’s financial problems are due to other reasons (e.g., profitability).

b) Comparatively expensive

Factoring lines are more expensive than lines of credit and loans of comparable size. Consequently, they are best used by equipment maintenance companies whose profit margins exceed 15%.

c) Customer cooperation is required

Your customers get a Notice of Assignment (NOA) at the start of the relationship. Additionally, the factoring company may verify invoices regularly for accuracy.

You need customers’ cooperation if you want to factor their invoices. Note that factoring is relatively common, and most midsized and large companies are familiar with it, so this is not usually a problem if managed correctly.

5. Costs

The cost of a factoring line is based on the size of your line, the credit quality of your invoices, and other details. Smaller lines usually have a percentage that increases as time passes. Larger transactions usually combine a small fixed rate and a “prime + X%” for the utilized funds.

The rate averages from 1.5% to 3.5%, though these rates vary based on the specific details of the transaction.

Go deeper: To learn more, read “Typical factoring Rates.”

6. Does your company qualify?

Qualifying for factoring is easier than qualifying for other solutions, such as lines of credit. In general, companies have to meet the following criteria.

a) Have creditworthy customers

The most important qualification requirement is to have customers with good business credit. Your customer’s creditworthiness is the main collateral for the transaction. This feature is what makes factoring attractive to small companies whose primary asset is a strong customer roster.

b) Invoice for completed work

Factoring companies can only finance invoices for equipment purchases, repairs, and installations that have been delivered to your client. Invoices for partial delivery or work that your customer has not signed off don’t qualify.

c) Be free of encumbrances

Your accounts receivable must be free of liens and any encumbrances. The factoring company must be able to place a first-position UCC lien against the invoices it is financing.

d) Be free of major problems

Companies with some tax problems can use factoring, provided a viable payment plan is in place. However, a factoring company won’t be able to finance your company if it is in serious tax default or at risk of bankruptcy.

Get more information

We are a leading factoring company and work with telecommunications equipment maintenance companies. For information, get an online quote or call us toll-free at (877) 300 3258.