Most delivery companies that work with commercial clients have to offer customers the option to pay invoices in 30 to 60 days. This practice – often referred to as “trade credit” – is demanded by most clients in their contracts. As a result, your revenues are often delayed, compared to expenses, by a month or two.
On the other hand, you have to pay most of your expenses shortly after incurring them. For example, you need to pay for fuel every day. You need to pay employees every week or two. And you need to pay for repairs and maintenance regularly.
Slow payments create cash flow problems
Slow-paying invoices can create cash flow problems if your delivery company is not well funded. This problem is common for companies that are starting and for companies that are growing quickly. Basically, you can operate your company until you run out of money. And then you must put all your expenses on hold until clients start paying. Obviously, this approach is not the right way to operate a business – not a successful one, at least. And if this problem is not managed correctly, you could lose clients rapidly.
The right time to address this problem is not when your delivery company has run out of money. Rather, try to correct the issue as soon as you notice that your cash reserves are decreasing and not recovering.
Ask for quicker payments
One simple way to solve a cash flow problem is to ask clients to pay sooner. You can actually get results by offering them a discount in exchange for a quick payment. Most companies offer a 2% discount for a quick payment, but that percentage is negotiable. While this method can yield quick results, it does not provide long-term, predictable cash flow. Clients always retain the option to pay slowly.
Finance your receivables
A better option for many companies is to finance their invoices. This strategy can relieve cash flow problems and provide predictable cash flow. This option enables you to reliably forecast your finances and allows you to secure new business without worrying about slow-paying clients.
Most factoring transactions are structured to finance invoices in two payments: the advance and rebate. You get the advance, between 80% and 90% of the value of the invoice, as soon as the delivery is completed and invoiced. The remaining 10% – 20% is rebated as soon as your client pays. The service fee is discounted from the second instalment. Additional information can be found in the article, “The basics of factoring.”
The most important advantage of invoice financing is that the line improves your cash flow quickly. Also, the facility is flexible and can grow as your sales grow, as long as the sales meet the funding requirements. These advantages make invoice financing an ideal alternative for companies that are growing quickly and need an immediate solution.
However, this solution is not perfect and does have some disadvantages. One disadvantage is cost. The solution is more expensive than other bank financing options. Also, your clients are likely know that you are financing your invoices. However, this type of funding is common enough that this knowledge is seldom a problem.
Can I qualify?
Invoice financing is relatively easy to get, especially when compared to a line of credit or a business loan. Since your invoices are the collateral securing the transaction, your clients need to have impeccable commercial credit. Also, your billing procedures must be well organized and efficient. Additionally, your company should be well run, your invoices should not have encumbrances, and your company should not have serious tax or legal issues.
Is this solution right for me?
Invoice financing helps your company if you have cash flow problems because you cannot offer payment terms to your clients. Unfortunately, invoice financing does not help you if your invoices have collections problems or if you need funds for expenses other than operations costs.
Most factoring lines can be underwritten and deployed fairly quickly. Usually the first funding infusion can happen in five to ten business days. Subsequent transactions can often be completed in one business day.
Get more information
We are a leading factoring company in Canada and can provide delivery companies with competitive factoring rates. For information, get an online quote or call (877) 300 3258.