Summary: Private investigators usually work with insurance and commercial clients. These firms can provide ongoing work reliably and can make great clients. However, they also pay their invoices in 30 to 60 days. This can create cash flow problems for detective agencies that need funds sooner to cover business expenses.
This article shows how to overcome this problem by financing your accounts receivable. We cover the following:
- Do you have this cash flow problem?
- Use factoring to improve cash flow
- Advantages and limitations
- Qualification criteria
- Qualification
- Use the line as a stepping stone
1. Do you have this cash flow problem?
Insurance companies and large companies can make great clients for private investigation and security agencies. They provide an ongoing source of work for your company.
Most companies pay their vendors on net-30 terms. This gives the company up to 30 days (varies) to pay their invoices. Vendors can invoice only after completing the work. Consequently, you must cover all business expenses while doing the investigation and waiting for payment.
Waiting for payment is not a problem for private investigators or security companies with a good cash reserve. They can use the cash reserve to pay for expenses while waiting for the client to pay their invoices.
a) Net-30 terms can create problems
Offering payment terms can create cash flow problems for detective agencies that don’t have enough funds in reserve. Small private investigation companies typically run into this problem. However, it can also affect agencies that are adding clients and growing quickly. Quick growth drains reserves, at least until invoices start getting paid.
Companies with cashflow problems can easily get into a financial tailspin unless this problem is corrected quickly. One way to fix this problem is to use factoring.
2. Use factoring to improve cash flow
An invoice factoring line works similarly to a line of credit secured by your accounts receivable. Basically, you finance your invoices to improve your cash position. Transactions settle once your customers pay their invoices. When used correctly, a factoring line can help improve your cash flow quickly and provides funds to pay business expenses.
a) How does it work?
Factoring lines typically finance your invoices in two installment payments. The first installment covers 85% to 90% of the invoice. It is deposited into your account when you submit it for financing.
The remaining 10% – 15% is held as a reserve. This helps cover the finance fees and any underpayments. Once your customer pays the invoice, it is returned to your company, less the factoring fees.
Learn more: Read “How does factoring work?”
3. Factoring advantages
Factoring has several advantages that can help small and growing private investigators. These are the four most important benefits:
a) Improves cash flow quickly
The most important benefit of working with a factoring company is that it can improve cash flow quickly. This is the main reason why detective agencies work with factoring companies.
b) Offer 30 days but limit cash flow risk
A factoring line allows you to offer 30-day terms to your client but limits the risk to your cash flow. This makes factoring an effective tool for growth.
c) Flexible limit
Factoring lines are tied to your revenues. Increasing the line as your revenues grow is simple, provided your invoices meet the factor’s criteria.
d) Available to small companies
Factoring is available to small private investigation companies, including startups. As opposed to other solutions, your company does need to have substantial assets or be a specific minimum size.
e) Easy to obtain
Factoring lines have simples qualification criteria than other solutions of comparable size. Furthermore, lines can usually be deployed quickly.
4. Factoring limitations
Factoring lines have some limitations. You must consider these when determining if factoring is the right solution for your company. The main limitations are as follows:
a) Solves only one problem
A factoring line will only help if slow-paying invoices cause your main cash flow problem. It won’t help if your company has cash flow problems due to other reasons, such as slow sales or low profit margins.
b) Comparatively expensive
Factoring lines are more expensive than lines of credit of similar size. This is due to their flexibility, structure, and risk profile.
In our experience, a factoring line will work best if your profit margins exceed 20% and your invoices pay in 45 days or less. Note that factoring can work well in other scenarios. Evaluate your specific margins and customer payment profile when determining if factoring is right for you.
5. Qualification requirements
Qualifying for a factoring line is simpler than applying for other financing alternatives. The main requirements to qualify include having:
- Net-30 to 60 invoices
- Creditworthy clients
- Invoices free of encumbrances
Most factoring lines can be set up in 5 to 10 days. A line can usually be set up faster if the client is well-prepared, has all their application documents ready, and has no major tax issues.
6. Use the line as a stepping stone
Factoring is an effective solution to improve cash flow. However, it is expensive. Using financing usually decreases your profit margins. Consequently, factoring should be used only to solve a specific cash flow problem and for a limited period.
Your objective should be to eventually move to a cheaper solution or become self-sufficient. Factoring can also be a stepping stone to cheaper options like sales ledger financing. Alternatively, consider using your improved cash flow to increase the size of your cash reserve. This should allow you to reduce your need for financing or eliminate it.
Get a factoring quote
We are a leading factoring company and can provide you with competitive terms. For more information, get an online factoring quote or call us at (877) 300 3258.