There is a common perception that starting and operating an office cleaning company is relatively easy. The reality is that business owners constantly juggle demands on their cash flow. For example, employee and supplier expenses tend to be fairly regular and need to be paid on time. On the other hand, office building management companies and other customers usually ask for net-30 to net-60 days to pay invoices. This difference in timing between expenses and revenues is a common source of cash flow problems.
The effects of slow-paying clients
Most commercial janitorial clients demand payment terms as a condition of doing business. Providing this type of credit is a common business practice in Canada, and most large companies expect it. The problem is that few janitorial companies have the resources to wait up to 60 days for a payment. They just can’t afford it.
Unless you plan your revenues carefully and your clients always pay on time, you will run into cash flow problems. And, at times, you may simply run out of money and be unable to pay employees or suppliers. Fortunately, you can solve this problem by factoring your invoices.
Financing invoices improves cash flow
You can solve this common cash flow problem, and grow your office cleaning company, by financing your invoices. This solution works by partnering your company with a factoring provider. The factor finances your invoices from slow-paying, but creditworthy, clients and provides you with the funds you need to operate your business. When used correctly, a factoring program improves your cash flow and enables you to take on new clients, while minimizing the associated cash flow problems.
How does a factoring program work?
Factoring transactions are relatively simple and are structured as the purchase of your accounts receivable in two instalments. The first instalment covers about 80% of your invoices and is wired as soon as the cleaning and janitorial work has been completed. The second payment of 20%, less fees, is wired once your customer pays on their regular schedule. Note that your clients do not need to pay their invoices sooner.
Who can qualify for factoring?
Most janitorial and office cleaning companies that have commercial clients that reliably pay invoices in 30 to 60 days will qualify. Aside from that, your accounts receivable need to be free of liens and your company should not have serious tax or legal problems.
Advantages and disadvantages
Factoring has a number of benefits and a few disadvantages. The most important benefit is that factoring improves your cash flow fairly quickly. It also allows you to provide terms to your clients, but without the associated financial problems. Lastly, the line is designed for growth. Most factors are able to increase your line quickly as your company grows, as long as your customers have good credit. This flexibility makes factoring ideal for small companies that aren’t well capitalized and need funding.
However, factoring does have some disadvantages. Because factoring can be more expensive than other commercial finance options, it works well only if your company has profit margins over 15%. Also, factors need to interact with your company and its clients regularly, so the solution is not completely invisible. However, for most clients, the benefits far outweigh the disadvantages.
The cost of most lines is based on a percentage of your invoices. Basically, think of factoring as selling your invoice at a discount that ranges from 1.5% to 3.5% per 30 days on the face value of the receivable. However, costs vary based on a client’s risk profile.
What about problem invoices and collection problems?
There is a common misconception that factoring can help your company if you have bad invoices – basically those that are being disputed or those that will never pay. However, factors only finance high quality invoices that have a good chance of paying in 60 days.
Financing collection problem invoices is counterproductive and does not help your company. You are better off working with a barrister or a collections agency.
Get an online quote
Is your office cleaning company looking for financing? We are a leading factoring provider in Canada and can offer competitive terms. For information, call (877) 300 3258 or get an online factoring quote.