One of the challenges of working with general contractors, utility companies, and commercial clients is that they often pay their invoices in 30 to 60 days. They can be great clients because they provide steady and reliable work. However, this value comes at a cost: slow payments.
Slow payments can be a problem for small underground utility-locating companies. Many of them have employees, which means they need to meet payroll regularly. If your clients pay slowly and you don’t have cash reserves, meeting payroll can be difficult.
Slow payments put you in a difficult position
Slow-paying clients put your company in the difficult position having to balance taking on new clients with being able to meet payroll and other expenses. Basically, you risk running into cash flow problems if you offer terms, and you risk losing new business if you don’t offer terms. It’s a serious problem.
Build a reserve
One way to prevent this problem from happening to your underground utility-locating company is to build a cash reserve. You should save a portion of your profits every month and, eventually, you will build a cash reserve sufficient to run your business comfortably. Unfortunately, there are two problems with this strategy:
- Building a reserve is difficult and takes time
- Reserve funds can’t be used to grow the business
Because of these drawbacks, many companies complement their existing reserves with an invoice financing solution. Invoice financing allows companies to weather many cash flow problems that originate from slow-paying clients, and positions them for growth.
Use invoice financing to improve cash flow
An invoice financing plan (factoring) provides financing for your slow-paying invoices from creditworthy commercial clients, such as utility companies. This plan provides you with immediate funding that can be used to meet payroll and other important expenses. When used correctly, invoice financing enables you to offer 30- to 60-day payment terms by accelerating the funds tied to your accounts receivable. This strategy can help you grow your business by allowing you to take on new customers.
How does it work?
Setting up an invoice financing line is fairly easy. Most invoice factoring companies will fund your invoices using a two-installment transaction. The first installment – the advance – covers about 80% of the receivable and is wired to your company as soon as the work has been completed and the invoice has been verified with the client.
Your company gets the second installment of the remaining 20% as soon as your utility client pays the invoice on the usual terms. The finance fee is usually deducted from this installment. The cost of factoring an invoice ranges from 1.15% to 3% per 30 days based on the size of your invoices and their credit quality.
Invoice credit quality
The success of the whole transaction hinges on the credit quality of your invoices. Basically, the factoring company is financing your receivable under the assumption that your client will pay in 30 to 60 days. Because of this assumption, finance companies review the commercial credit profile of your clients.
Most utility companies have excellent credit, which makes them good candidates. General contractors, on the other hand, can be difficult to qualify and are handled on a case-by-case basis.
However, if your clients have good commercial credit and if your company has good invoicing practices, you should be a good candidate for invoice financing.
Is factoring right for your company?
This solution is designed to help companies who have one problem: working capital shortages because of slow-paying customers. If your underground utility-locating company has this problem, it’s likely that factoring is right for you, especially if your clients have good commercial credit. Invoice financing can be an ideal solution for utility locators who have great opportunities but are being held up by slow-paying clients.
Get more information
We are a leading construction factoring company and can provide your utility locating company with competitive terms. For information, get an online quote or call (877) 300 3258.