For many technology entrepreneurs, managing cash flow can be very difficult, especially if the company is new and does not have a lot of funding. On the expense side, you need to pay vendors and contractors regularly. Some may offer flexibility and let you pay in net-30 to net-60 terms, but most demand quick payment. You also need to cover payroll expenses, which are often the biggest and most difficult expense (especially for software development companies). Unlike regular vendor payments, employees need to be paid often and their payments can’t be delayed.
Obviously, these expenses tap your limited financial resources.
Revenues are often slow
However, if you sell technology services and products to large corporations or government entities, you need to offer payment terms that give your clients the option to pay invoices in up to 60 days. Most corporations negotiate hard for these terms because it improves their cash flow. You don’t have much of an alternative here; you just have to wait for your payment.
The result is that you end up covering expenses to deliver your products and services and then must wait up to 60 days to recover your funds. Few small companies can operate – or grow – under these conditions.
Conventional financing is tough to get
Most entrepreneurs have a number of options to finance their businesses. They can use their own funds or try to raise money from friends and family. Or, if they are among the lucky few, they may get venture capital or an angel investment. However, these options usually involve giving away equity, and many options have other issues.
Another alternative, a bank loan or line of credit, is a great way to solve working capital problems. This approach may work if your company is established and has ongoing revenues. However, most banks are conservative in their lending and only finance companies with long track records of revenue growth, developed assets, and a solid management team.
You can fix the problem by factoring invoices
If your main financial problem stems from slow-paying technology customers, you can fix it by factoring invoices – a simple solution that accelerates the revenues tied to slow-paying accounts receivable. This strategy improves your cash flow and provides the funds you need to pay suppliers and employees. And, unlike other solutions, invoice factoring does not require you to give up equity and enables you to grow your company organically.
How does invoice factoring work?
Invoice factoring is relatively simple to use. You partner with a factoring company, who intermediates the financial transaction. Invoices are often financed in two installments: the advance and the rebate. The factor provides the advance as soon as the client accepts the project or deliverable. The advance often covers 80% of the invoice and is wired to your bank account.
The remaining 20% is rebated when the client pays the invoice in full. The factoring fee is often discounted from the rebate and can be as low as 1.15% per 30 days. However, fees vary based on a number of criteria.
Can your technology company qualify?
Qualifying for an invoice factoring line is relatively simple. The most important requirement is to have creditworthy commercial clients because their invoices secure the transactions. Aside from that, your company should not have legal or tax problems and its invoices should be unencumbered by liens.
Get a strategic advantage
Invoice factoring can provide a strategic advantage to your company, especially if your growth was limited by tight cash flow. Unlike most solutions, which have a fixed limit, the factoring line is flexible. The line can increase and match your growing revenues as long as your accounts receivable are from quality customers and your company meets the funding criteria.
If tight cash flow and slow payments were preventing you from growing your company, invoice factoring can change that. It is an ideal option for small and growing technology companies with cash flow problems due to slow-paying clients.