Security guard companies can be very profitable to operate since they tend to grow quickly when managed correctly. Furthermore, security guard companies often have high profit margins, which makes them an attractive business.
While a fast-growing business is rewarding, it often brings significant financial demands to its owners. It is not unusual for agencies to grow “too fast.” Growing “too fast” may sound like an advantage. However, it is a problem and can deplete a company’s cash reserves and leave them scrambling to make payroll. This serious problem may affect the agency’s ability to remain in business. This article discusses how to handle this problem by financing payroll. It covers:
- The root cause of the cash flow problem
- Ask for faster payments?
- Can you finance your invoices?
- How does factoring work?
- Alternatives for larger security agencies
1. What is causing the cash flow problem?
Most security guard agencies experience cash flow problems because their expenses get ahead of their revenues. The company has clients and is growing, but, somehow, it is always cash poor. Let’s examine this situation in more detail.
The most significant expense for a security guard agency is payroll. Payroll is due every week and can’t be delayed or short-paid. Failing to pay employees has severe consequences for the business. Now, let’s look at revenues. Revenues come from commercial clients that pay their invoices in net-30 to net-60 terms.
There is a significant mismatch in the timing of expenses and revenues. Consequently, your company has to pay expenses, such as payroll, from its cash reserve and wait 30 to 60 days to get paid back. It’s easy to see how this delay can lead to problems. This situation leaves your company in a weak financial position where unexpected growth or late payments could send it into a financial tailspin.
2. Can you ask for faster payments?
You could solve your agency’s financial problems by asking clients to pay quickly. However, this strategy seldom works. Unless you have a great relationship with your clients or are truly irreplaceable, you will have to abide by their payment terms.
One option that can work well is giving clients an incentive to pay you faster by offering an early payment discount. Early payment discounts provide clients with a 1% to 2% discount if they pay in less than ten days. Otherwise, they must pay the total amount.
Early payment discounts are great tools but have two drawbacks. The first one is that they are voluntary. As such, your clients can revert to paying on their usual terms at any time and without notice. A less-talked-about problem is that early payment discounts can be abused. Some clients may be tempted to take the discount but still pay you in 30 to 60 days. This maneuver leaves you cash poor and with little recourse. Consequently, it’s best to offer this discount only to your best clients – those with excellent business credit.
3. Can you finance your invoices?
If clients are unwilling to pay sooner or are not motivated by early payment discounts, consider using payroll financing. Payroll financing solutions allow you to leverage your accounts receivable and provide cash flow to cover business expenses. The most common payroll financing solution is invoice factoring.
Factoring your invoices allows you to finance slow-paying receivables, accelerating your cash flow. This cash infusion provides the funds to pay for business expenses and take on new clients. Factoring provides many of the benefits of a line of credit but works differently.
4. How does invoice factoring work?
Factoring transactions are structured as the sale of your invoices rather than as a loan. This difference can work to the advantage of new and growing security agencies. Your company sells the invoice to the factoring company, which pays for it in two installments. The first installment is called the advance and covers 85% to 90% of the invoice total.
The remaining 10% to 15%, less the factoring fee, is deposited once your customer pays the invoice on their usual terms. This payment settles the transaction. Factoring works like a revolving line of financing; your security guard agency can sell invoices as often as needed. To learn more, read “What is Factoring?”
a) How much does it cost?
The cost of factoring varies based on the volume of financing you need and the credit quality of your clients, among other things. Typical rates range from 1.15% to 3.5% per 30 days. However, fees are set to match the specific risk profile of the opportunity. Rates can be pro-rated to account for smaller or longer time periods.
b) Does your company qualify?
Qualifying for factoring is easier and simpler than qualifying for other solutions. Your security guard agency must:
- Provide good a service
- Work with creditworthy commercial clients
- Be up to date on taxes (or have a plan in place)
- Have a reasonable profit margin
Learn more about qualifying for factoring.
Factoring has several advantages over other solutions. Here are the four most important benefits for small and growing security agencies.
a) Improves cash flow quickly
The most important advantage of invoice factoring is that it quickly improves your cash flow. The initial advance can be deposited shortly after you become a client and submit valid invoices.
b) Easy to get
Getting an invoice factoring line is easier than qualifying for a business line of credit. The solution is accessible to small and medium-sized security guard agencies.
c) Grows with your business
Unlike other solutions, the factoring line can grow alongside the revenues of the security guard agency. The most important requirement to increase the line is to work with high-quality business and government clients.
d) Short-term commitments
Factoring lines can be used for a short period of time and don’t require long-term commitments. It can help security guard companies that are simply going through a temporary cash-flow problem.
6. Alternatives for larger security companies
While factoring is a great solution, it is not for everyone. Larger agencies with established invoicing and collections departments may be better off using sales ledger financing. Sales ledger financing helps companies that have outgrown the need for factoring but are not ready to qualify for bank financing.
This solution, also referred to as a ledgered line of credit, is designed to work like a revolving line of credit secured by accounts receivable. Companies are allowed to draw against the credit line up to a predetermined limit. The outstanding balance is reduced as clients pay invoices on their usual schedule.
Sales ledger financing is cheaper than a similar invoice factoring line but still more expensive than a line of credit. They are often used as stepping stones to eventually qualify for a conventional line of credit.
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We are a leading factoring company and can provide you with high advances at competitive rates. For information, please get an online quote or call us toll-free at (877) 300 3258.