Managing the working capital of a small and growing office cleaning company can be difficult. The company usually has to pay its regular expenses before it gets paid by clients. This payment delay can lead to financial problems. This article discusses two techniques to improve your cash flow and financial stability. We cover:
- Slow-paying clients and cash flow
- Early payment discounts
- Financing your invoices
- Advantages of using financing
- Is factoring right for your company?
1. Slow-paying clients and cash flow
One of the advantages of operating an office cleaning company is that you work with businesses rather than retail clients. Business clients require daily services and usually pay well. The client roster usually includes office management companies, commercial landlords, and regular businesses.
The main challenge of having business clients is that they pay their invoices on net-30 to net-60 terms. Payment terms are common in commercial transactions and give your clients four to eight weeks to pay their invoices.
a) Expenses vs. cash flow
Cleaning companies often have to pay expenses for providing the service before their clients pay their invoices. For example, payroll must be paid every week or two weeks. You also need to buy supplies, handle equipment issues, etc. All of these expenses occur before your customer pays.
The cleaning company has to pay for those expenses out of its cash reserves. Then, the company must wait until the customer pays. The company can replenish its reserves and book its profit when the customer pays their invoice.
b) Are net-30 accounts a problem?
Having net-30 accounts should not be a problem if your company has an adequate cash reserve. Unfortunately, new and small companies seldom have a good cash reserve. Even if a company has a cash reserve, it may not be sufficient if your company starts to grow quickly.
Your company can easily get into financial problems if your cash flow is tight. Unfortunately, all it takes is a few late or missed payments. There are two ways to handle this situation.
2. Early payment discount
Companies with minor cash flow problems should consider offering an early payment discount to select clients. The process is simple. Customers get around a 2% discount if they pay their invoice in 10 days or less. The customer always has the option to pay the full amount on their usual terms.
a) How to use them
Early payment discounts can improve your cash flow while also improving customer satisfaction. However, the discounts must be used correctly. Avoid offering the discount to customers that are not good payers. The discount won’t do much to improve their behavior and could create problems. Instead, offer it to only your best clients. These clients are the ones who always pay within terms.
Unfortunately, early payment discounts have one important limitation as a cash flow tool. They are a voluntary benefit. Your customers use it only when it works for them. Consequently, you can never be sure if they will pay early or not.
Furthermore, they may stop using the benefit during difficult economic conditions. During those times you will likely need early payments the most. Instead, companies that need reliable cash flow should consider financing their invoices with factoring.
3. How to finance your invoices
Small and growing office cleaning companies that need to improve their cash flow reliably should consider factoring their invoices. Invoice factoring allows you to finance slow-paying invoices from creditworthy commercial clients. Factoring can provide your company with a working capital infusion and provide the funds to cover business expenses.
a) How does factoring work?
Most accounts receivable factoring transactions are not structured like a loan. Instead, they are structured as the purchase of your invoices. This structure allows factoring companies to work with small businesses and deploy funding quickly.
Factoring companies usually buy invoices in two instalments. The first instalment is called the advance and covers around 85% of the invoice. It’s deposited at the start of the transaction. The remaining 15%, less the factoring company’s fee, is deposited when your client pays the invoice in full. To learn more, read “What is Factoring?” and “How Does Factoring Work?”
4. Advantages of using financing
Factoring can be a great tool to improve cash flow and has several benefits over other alternatives. Here are some of the more important advantages:
a) Improves cash flow quickly
The main reason companies get factoring is to improve their cash flow. Factoring can improve cash flow very quickly and effectively.
b) Enables you to handle net-30 accounts
Factoring enables you to offer net-30-day terms to your customers while minimizing cash flow concerns. You always have the option to finance your invoices if you need funds.
c) Grows with your business
The line is adaptive and grows with your business. Line increases can usually be approved in a day or so as long as you work with high-quality customers.
d) Easy qualification requirements
Factoring lines have easier qualification requirements than bank financing of comparable size. This benefit makes factoring a viable alternative for companies that can’t qualify for financing or have fallen out of covenant.
e) Available to small business
Factoring lines are available to small businesses that won’t usually qualify for conventional financing.
Factoring lines have some limitations that business owners should keep in mind. Business owners should consider the following three limitations:
a) Solves one problem only
A factoring line solves a single problem. It helps janitorial companies whose cash flow problems result from slow-paying customers. It cannot help your business if the cash flow problems are due to other reasons, such as low profitability, client acquisition, etc.
Factoring is more expensive than a conventional line of similar size. It works best in janitorial companies whose gross margins are above 20% and whose customers pay in less than 60 days.
c) Only creditworthy invoices
Factoring lines cannot help your cash flow if your invoices have collections problems. In this case, your best option is to discuss your situation with a collections professional.
6. Do you qualify?
Factoring lines have simpler due diligence requirements than typical lines of credit and loans. They are easier to obtain and can be deployed faster.
a) Invoices from creditworthy customers
The most important requirement is to have invoices from creditworthy customers. Factoring companies determine the commercial credit of your customers using service bureaus such as Dun and Bradstreet.
b) No encumbrances
Your invoices must be free of encumbrances, such as liens and hypothèques. They cannot be pledged as collateral for a loan since that would preclude you from selling them to the factoring company.
c) No immediate risk of bankruptcy
While factoring can be used in turnaround situations, the company must not be at immediate risk of bankruptcy.
7. Is factoring the right solution for your company?
In general, a factoring line should help improve the cash flow of your janitorial company if the following are true:
- The main problem is slow-paying clients
- Profit margins are above 20%
- Clients are creditworthy
- Invoices pay on net-30- to net-60-day terms
Consult an accountant or similar professional if you are unsure if factoring is right for you.
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 us toll-free at (877) 300 3258 or get an online factoring quote.