Most commercial clients pay their invoices in 30 to 60 days. These terms can create cash flow problems for landscaping companies that can’t afford to wait for the payment. Invoice factoring allows you to solve this problem by financing slow-paying invoices for commercial clients. This improves your cash flow and allows you to grow your business. This article covers the following:
- Net-30 terms can drain cash flow
- Can early payment discounts help?
- What is invoice factoring?
- What if you work with general contractors?
- Advantages of using factoring
- Is this solution right for your company?
1. Net-30 terms drain cash flow
Working with commercial clients has several advantages for landscaping companies. Large office buildings, apartment complexes, hotels, and similar clients can offer long-term contracts. These contracts provide steady work and ongoing revenues. However, working with these clients has one challenge.
Commercial clients don’t pay their invoices quickly like your retail clients. Instead, they operate as net-30 accounts. The client requires your company to give them 30 to 60 days to pay an invoice. Offering terms to commercial clients is standard practice and expected by them.
Offering terms can also create cash flow problems for landscapers that don’t have a cash reserve. These problems happen because landscaping companies have immediate expenses. For example, they need to pay employees, plant nurseries, and other suppliers quickly. However, their commercial customers pay invoices in 30 to 60 days. This delay creates a gap in the company’s cash flow. This gap can grow and become a serious problem unless it is managed early on.
2. Can early payment discounts improve your cash flow?
Minor cash flow problems can often be fixed by making simple business changes. This easiest change is to try to persuade your best clients to pay quickly. A common and effective strategy is to use early payment discounts. They work by offering select clients a 1% – 2% discount if they pay their invoice in less than ten days. This is a great opportunity for customers that take the offer because it increases their profits. It is also good for your company since it improves your cash flow.
Early payment discounts can work well at times. However, they aren’t always effective and don’t work well during recessions. Unfortunately, this is usually when you need early payments the most. If early payment discounts are not solving your cash flow issues, consider financing your invoices using factoring.
3. What is invoice factoring?
Invoice factoring allows you to finance invoices from creditworthy customers that pay in 30 to 60 days. Instead of waiting to get paid, factoring companies advance the funds and pays immediately. This advance provides immediate working capital you can use to run your company.
Factoring transactions are often structured as invoice purchases rather than as a loan. Your company sells its accounts receivable to the factoring company that pays you quickly. Using an asset-purchase structure simplifies the qualification requirements and the speed at which the line can be deployed.
Factoring transactions are simple. The factoring company buys the invoices in installments. The first installment covers 75% – 85% of the invoice’s total value. It’s deposited into your bank account shortly after processing. The factor deposits the remaining 15% – 25% as a second installment once the invoice is paid in full. Factoring companies subtract their fees from the second installment. To learn more, read “What is factoring?”
4. Do you work with general contractors?
Landscaping companies that work with general contracts (GC) cannot use conventional invoice factoring. This is due to the construction industry’s billing and payment practices. Instead, the landscaping company will need to use construction factoring. Construction factoring is a specialized product adapted to work with construction subcontractors.
Construction factoring and invoice factoring are similar products. The main differences are that construction factoring companies have additional processes to handle the following three situations.
a) Progress payments
Construction factoring programs can manage progress payments. These types of payments are common in construction projects. These invoices usually require detailed verification to ensure that the work has been delivered by your company and has been accepted by the GC.
b) Pay when paid
Many general contractors have a “paid when paid” clause in their contracts. This clause allows them to pay the landscaping company only after the end customer pays them. Conventional factoring companies cannot handle these clauses due to their high risk. Construction factoring companies can handle these invoices but only if the GC waives the “paid when paid” clause. Getting this clause waived is difficult but can be done if your work is essential to the project.
General contractors often hold back a percentage of an invoice (or project) with every payment. These retainage funds are paid once the project is completed and inspected. Unfortunately, retainage invoices can’t be factored. This is because they often take more than 90 days to pay and can be subject to disputes.
5. Advantages of using factoring
Factoring lines have several benefits over alternatives such as loans and lines of credit. The most important benefit is that it can quickly improve your company’s cash flow. This is important for landscapers that need funds to run their businesses. Additionally, factoring has the following benefits:
- Easier to obtain than loans
- Can be used by seasonal businesses
- Line adapts to growing revenues
- Can be used as a short-term solution
6. Is factoring the right solution for you?
Factoring is designed to improve cash flow in companies whose issues are due to slow-paying commercial clients. It may help you if your:
a) Clients have good business credit
You can use factoring only if you work with commercial clients or general contractors. Additionally, your clients must have good business credit. Note that factoring cannot be used to finance invoices from residential customers.
b) Invoices pay in less than 90 days
Factoring works best for invoices that pay within 15 and 60 days. Factoring companies are unable to finance invoices that pay in 90 days or longer due to the risk of these invoices.
c) Company has profit margins above 20%
Your landscaping company must have profit margins of 20% or higher. However, landscaping companies can have profit margins of 15% – 45%. This depends on their business focus and their cost structure. Companies with lower profit margins must ensure the company can handle the cost of financing.
d) Company has no serious tax problems
Your company should be up to date on all its taxes. Companies with tax problems can be factored only if they have a viable payment plan with taxing authorities.
Get more information
We are a leading factoring company and can provide you with competitive terms. For information, get an online quote or call (877) 300 3258.