Financing a Call Center Using Invoice Factoring

Many companies consider call centers an essential but expensive aspect of their sales and customer service strategy. However, operating a call center in this highly competitive industry is challenging. Call center operators can easily experience cash flow problems, especially if they are new or growing quickly.

This article discusses how to effectively solve the most common cash flow problem using factoring financing. We cover the following:

  1. Why is cash flow a problem?
  2. The simple solution is not reliable
  3. Invoice factoring improves cash flow
  4. Advantages and limitations
  5. Qualification requirements
  6. Is factoring right for your company?

1. Why is cash flow a problem?

The cash flows of a call center operator vary based on how the business is configured. For example, a call center using an “on-premise” business model must have a facility where customer service representatives (CSRs) go to work. Alternatively, call centers that use a “virtual” model don’t have a facility to house CSRs. Instead, all CSRs and employees work from home using resources provided by the call center.

Regardless of configuration, call centers share a common characteristic. They are expensive to own and operate. They have high recurring expenses and are cash-flow intensive. Examples of overhead costs include:

  • Rent
  • Payroll
  • Telecommunications
  • Internet connections
  • Software licenses (CRM, etc.)
  • Facilities
  • Utilities

Most of these costs are usually recurring. Employees and CSRs must be paid weekly or bi-weekly. Leases and software licenses are usually paid monthly or quarterly. Making these payments on time is essential to keep operations running smoothly.

a) Invoices are paid on 30-day terms

Call centers work with medium-sized and large corporate clients. These clients operate as net-30 (or longer) accounts. They usually take 30 to 60 days to pay an invoice. Your company gets paid a month or two after providing the service. Offering these types of payment terms is expected but delays your revenue.

Call center operations must use their cash reserves to cover expenses while they wait for invoice payments. This arrangement won’t be a problem for call centers with large cash reserves. However, this situation can be a problem for call centers with small reserves. It can also affect call centers that are expanding quickly.

2. The simple solution that is not reliable

There is a simple way to improve cash flow. You can offer a discount for early payment to select clients. Your client gets a 1% to 2% discount if they pay within ten days. Otherwise, the client pays the total amount on their usual terms. Clients who take this offer increase their profits without much risk. It’s an excellent opportunity for them.

Early payment discounts can provide good results when they work. Unfortunately, they aren’t always reliable. Taking the discount and paying early is voluntary. You can never be sure if clients will pay early or not. Also, your clients are not likely to pay early during a recession.

Companies with mild cash flow problems can probably benefit from offering early payment discounts. However, call centers that need reliable cash flow or have moderate problems should consider financing. Invoice factoring is one of the most effective financing tools to solve this problem.

3. Invoice factoring improves cash flow

Invoice factoring allows call centers to finance slow-paying invoices from corporate clients. The solution provides you with an immediate working capital injection that can be used to cover expenses or service new contracts.

Factoring transactions are not loans. Instead, the factoring company buys your accounts receivable and pays for them in two installments. This type of structure has simpler qualification requirements than conventional loans. It can also be deployed quickly.

The first installment is advanced shortly after you submit the invoice. It covers around 85% of the invoice. The second installment is advanced once your end customer pays the invoice on their usual terms. It covers the remaining 15% less the factoring fees. The second installment settles the transaction. Companies typically use factoring regularly because it provides an ongoing source of working capital. Read “How Does Invoice Factoring Work?” to learn more.

4. Advantages and limitations

Factoring has two main limitations. It only helps companies that have cash flow problems due to slow-paying invoices. It won’t help a company with cash flow problems due to other issues (e.g., an unprofitable company). Additionally, factoring is more expensive than conventional financing and should be used by companies with margins above 15%.

Factoring has several advantages, making it an ideal solution for small and growing call center operations that want to improve cash flow. Here are the most important benefits:

a) Solves the problem quickly

The main advantage of factoring is that it can improve your cash flow quickly. This benefit makes factoring a great option for companies that need funding immediately.

b) Enables you to offer net-30 terms

Factoring allows you to offer net-30 payment terms while minimizing the potential cash flow problems of slow payments. When used correctly, it’s a great tool to finance growth.

c) Easier to obtain than business loans

Factoring lines have easier requirements than other solutions. This benefit makes factoring ideal for startups, new companies, and companies going through a turnaround.

d) Line adapts to revenues

The line is linked to your company’s revenues from quality customers. It can grow as your business grows, provided your invoices qualify.

4. Do you qualify for factoring?

Qualifying for factoring is easier than qualifying for a conventional loan. This is because you are selling your invoices rather than getting a loan. To qualify, the call center must:

  • Have quality customers
  • Not have liens against A/R
  • Not have severe tax problems

5. Is factoring right for your call center?

While each call center’s situation is different, companies can use three general criteria to determine if factoring can help them.

a) Is your cash flow problem due to slow-paying invoices?

Factoring can help you only if your financial problems are due to slow-paying clients. Examine your financial reports to determine if a large proportion of your funds are tied to your accounts receivable.

b) Are your profit margins high enough?

You must ensure that your profit margins support the cost of factoring. In general, factoring works best if profit margins are above 20% and if invoices pay in less than 60 days.

c) Are your invoices unencumbered?

You can use factoring only if there are no liens against your invoices. The factoring company must be able to secure its position against the A/R it finances.

Get more information

We can provide you with a competitive factoring quote. We offer high advances at low rates. For more information, call us toll-free at (877) 300 3258.

Note: Always consult a CPA or similar expert if you need advice or if your company has financial problems.