A common problem for commercial landscaping companies is that corporate customers usually pay invoices in 30 to 60 days. As a landscaper, you often have to provide payment terms to your clients if you want to win their business. However, offering payment terms can expose you to cash flow problems. This article discusses how to offer net-30 terms while minimizing the effects on your cash flow. We cover:
- Should you offer net-30 terms?
- Using early payment discounts
- Finance invoices with factoring
- How much does it cost?
- Advantages and limitations
- Do you qualify?
1. Should you offer net-30 terms?
One of the challenges of working with commercial clients and construction companies is that they often require net-30 to net-60 terms. Giving clients net-30 terms (or longer) allows them to pay an invoice weeks after the service is fulfilled.
Your clients love getting payment terms because it’s good for their cash flow. However, offering terms exposes your company to credit and cash flow risks. Credit risk is the risk that your company will provide terms to a client who is unable (or unwilling) to pay. Ultimately, bad credits turn into collections problems or bad debt. Cash flow risk, on the other hand, is the risk of running out of funds to pay operating expenses before the client pays the invoice.
Commercial landscapers can limit credit risk by offering net-30 terms only to clients with good commercial credit. It’s a good practice to always review a corporate client’s credit report before signing a large contract. Credit information is available from credit bureaus such as Dun and Bradstreet.
Managing cash flow risk is more complex than managing credit risk because cash flow is affected by most company activities. Let’s examine the revenue side of the business, for example. Landscapers who work directly for the client often have to wait 30 to 60 days to get paid. However, working as a subcontractor to another company, such as a general contractor (GC), is even more complex. It may introduce so-called “pay-when-paid” clauses common in construction. These clauses allow the GC to pay only after the end client pays them.
Having a good cash reserve is essential to avoid working capital problems. It helps ensure your company has the funds to pay expenses when they come due. Unfortunately, few companies have adequate cash reserves. If the company’s cash reserve is not sufficient, it should consider the strategies outlined in the next section.
2. Use early payment discounts to improve finances
Landscapers with minor cash flow problems can improve their finances by offering early payment discounts. Early payment discounts are common in commercial transactions and can work well. Offer select clients a discount, usually 2%, if they pay in ten days or less. They can always decline the discount and pay the total invoice on their usual terms.
Business owners often make the mistake of offering this discount to their slowest-paying clients. The owners hope the discount may entice the customer to pay sooner. Unfortunately, offering discounts to bad payers often backfires. Instead, offer early payment discounts to only your best clients. These clients are those who regularly pay on time. This strategy minimizes the chances of problems and rewards good-paying clients.
Early payment discounts have an important limitation. They are optional, and the client can decline to use them at any time. You can never rely on a client to pay early. Furthermore, clients often stop paying early during difficult economic times, which is when you need fast payments the most. For this reason, companies that need more reliable cash flow should consider invoice factoring financing.
3. Finance invoices with factoring
Invoice factoring is an effective way to improve your company’s working capital. It provides an advance against invoices from slow-paying clients. The advance works as a cash infusion that helps your company meet expenses and make new investments.
Transactions are usually structured as asset purchases rather than loans. This distinction is important because invoice purchases have simple due diligence requirements. This allows factoring to be used by small and midsized companies.
a) How does factoring work?
The type of factoring your company uses depends on the kind of commercial client you have. Landscapers who work with general contractors and builders often have “pay-when-paid” clauses in their contracts. These landscapers will need to use construction factoring, a specialized form of financing for the construction industry. Companies that don’t have this clause can use conventional factoring.
Factoring companies usually buy invoices using two instalments. The first instalment averages about 85% of the total invoice value unless the invoice is subject to a “pay-when-paid” clause. Invoices with this clause usually have lower advances, closer to 75%. The second instalment covers the amount that was not initially advanced, less the fee. This instalment settles the transaction. To learn more about factoring, read “What is Factoring?” and “How Does Factoring Work?”
4. How much does it cost?
Factoring lines are priced based on volume, credit quality, and general risk. They are usually more expensive than conventional loans. Landscapers can expect to pay between 1.75% and 3.5% per 30 days outstanding. Due to the risk, construction factoring lines tend to have higher prices than conventional factoring lines of comparable size.
5. Advantages and limitations
Factoring has several advantages that make it an ideal solution for small and midsized commercial landscaping companies with working capital issues. These benefits have to be balanced against the product’s limitations to ensure it’s the right solution for your business.
i. Solves cash flow problems quickly
The most important advantage of factoring is that it solves cash flow problems created by slow-paying clients. The product was created to solve this specific problem.
ii. Adaptive line
Factoring lines are dynamic and don’t have hard limits like those of conventional banking solutions. Lines can adapt to growing revenues as long as you work with creditworthy clients.
iii. Easier to obtain
Getting a factoring line is easier than getting a bank line of credit of comparable size. Lines have simple qualification requirements.
vi. Deploys quickly
Factoring lines can be underwritten and deployed quickly, sometimes in days. This quick turnaround makes factoring a viable option for commercial landscape companies that need immediate funding.
However, factoring lines have two important limitations that companies should consider.
i. Solves a single problem
The main limitation of factoring is that it helps only those companies whose cash flow problems are due to slow cash flow. It won’t help companies that have financial problems due to other reasons.
ii. Relatively expensive
Factoring is a relatively expensive solution. It’s one of the trade-offs that come with the product’s speed and flexibility. Consequently, it’s best used by companies that have profit margins over 20%.
6. Do you qualify?
The qualification requirements of factoring programs are simpler than the requirements of business loans. Factoring companies focus the underwriting process on three areas.
a) Do you have creditworthy clients?
Having creditworthy clients is the most important criterion of the qualification process. Factoring companies only purchase invoices that are due from creditworthy companies. Consequently, your customers must be reliable payers.
b) Are your invoices encumbered?
A factoring company can finance your invoices only if they are free and clear of encumbrances. Consequently, they cannot be secured by another party through a PPSA lien or a hypothèque.
c) Is your company free of major issues?
Factoring companies can finance invoices from clients who are going through a turnaround or experiencing issues. However, the client must not be at risk of bankruptcy or have unworkable management problems.
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We are a leading factoring company and can offer landscaping companies competitive financing terms. For information, call us toll-free at (877) 300 3258 or get an online factoring quote.