Managing the cash flow of a directional boring (or directional drilling) company can be challenging. Like most construction-related companies, they face the usual dilemma of having to pay expenses quickly but having to wait up to 60 days to get paid. This payment delay can cause cash flow problems, leaving the drilling company unable to meet obligations or take on new clients.
Managing slow payments
Most utility, commercial, and construction projects have payment clauses allowing clients to pay invoices in 30, 45, or 60 days. These terms are a good deal for large clients, such as utility companies, who can use your services for up to 60 days before paying for them.
The problem is that your cash flow suffers. Most small drilling and directional boring companies are not well prepared for cash flow problems and can’t afford to wait for payments. There are two possible solutions.
Solution #1: Build a cash reserve
Building a cash reserve is the simplest, yet the most difficult to implement, solution. Ideally, your company should build a couple months’ worth of business expenses as a cash reserve that allows it to operate while waiting for client payments. Most companies simply put away some of their profits in to a savings account.
However, small business owners have difficulties building a reserve because they prefer to use funds to run the business or expand. They are not comfortable having money that just sits in a bank account. Consequently, few have sizable or reliable reserves.
Solution #2: Finance construction receivables
One way to complement your financial reserves is to finance your construction receivables. Construction factoring financing provides you with immediate funds to cover operational expenses and grow the business.
This solution provides many of the advantages of quick payments but does not actually require customers to pay any sooner. Instead, a finance company provides an advance for your slow-paying receivables — holding the invoice and waiting for payment — while you get funds.
This solution gives you the money needed to operate your business and minimizes the challenges of slow-paying clients.
Construction factoring financing can work well with most directional drilling companies that work with commercial, industrial, or utility clients. Basically, the construction factoring company finances your invoice in two installments: the advance and the rebate.
The advance covers about 80% of the gross value of your invoice and is wired to your account after the work is completed and the invoice is verified. The second payment covers the remaining 20% (less fees) and is wired to your account once your client pays the invoice in full.
Note that retainage invoices can’t be factored due to their payment schedules.
Billing by the foot vs. progress payments
Although conventional progress payments can be financed under the right circumstances, it’s often easier to factor invoices that bill by the foot or the yard. It’s also easier to finance invoices that cover a specified time period, such as a day of work.
Financing slow-paying invoices improves your cash flow, puts you in a better position to operate your drilling company, and allows you to offer payment terms to clients without having to worry about slow payments. If you were turning business away, or if offering terms was limiting your growth, using a construction factoring financing program can be a game-changer.
The line is flexible and can be used to grow the business. Unlike most conventional loans or lines of credit, the line can grow with your revenues — making construction factoring financing an ideal option for growing directional drillers with cash flow problems due to slow-paying clients.
Get more information
We are a leading construction factoring company and can provide you with competitive terms. For information, get an online quote or call (877) 300 3258.