Most staffing companies are launched by entrepreneurs who have vision and experience – but not necessarily lot of start-up capital. Many operate on tight cash flows for their first few years, as they build a reliable cash reserve and a steady portfolio of clients. However, growing a company with a tight cash flow is difficult. All it takes are a couple late payments and you could find yourself unable to pay your employees.
Offering payment terms
One of the main reasons technology staffing companies get into financial problems is that their clients don’t pay invoices when the staffing services are provided. Instead, they pay net-30 to net-60 days later. This practice is common since most large technology companies pay invoices on credit terms.
This payment delay is a challenge for staffing companies because they need to offer payment terms to clients. However, this credit is offered at the risk of potentially running out of money.
There is no good option. If you offer credit, you risk cash flow problems. If you don’t offer credit, you lose the client. To correct this situation, you must improve the reliability of your working capital.
Getting reliable cash flow
The problem is simple. You have funds tied to slow-paying invoices and need the money sooner. One way to solve this problem is to accelerate your revenues using a staffing agency financing solution such as invoice factoring. This program finances your slow-paying invoices from creditworthy clients and improves your cash flow. Factoring provides funds that can be used to pay employees and take on new clients.
How the program helps you grow
When used correctly, factoring your invoices can be used to grow your staffing agency efficiently. For example, assume that you have a contract that enables you to invoice a client weekly. However, they pay their invoices on net 45 days. Also assume that you pay your employees twice a month, on the 15th and the 30th.
You could take on the contract and factor each weekly invoice, which would give you the funds you need to meet payroll. If you manage this scenario carefully, you should be able to add employees and still have sufficient funds to pay them.
As you can see, invoice factoring can help you grow past your current financial limitations.
How does invoice factoring work?
Invoice factoring works by financing your invoices in two instalments. The first instalment is the advance. Technology staffing agencies can usually get high advances, often around 90% of the invoice. This amount is wired to your account as soon as the work has been completed and the time cards have been signed by your client. The remaining 10% is rebated as a second instalment as soon as your customer pays their invoice on their usual schedule. The finance fee is usually deducted from the second instalment. You can find detailed information in this article.
Qualifying for this program is relatively easy, and new companies can usually qualify. It’s important that your invoices are due from creditworthy customers, since these invoices secure the transaction. Additionally, your receivables should not be encumbered, and you should not have serious tax or legal issues.
Invoices with collections problems
One important point is that invoice factoring does not help you if your invoices have collections problems due to credit issues or disputes. If your client does not want to pay your invoices, invoice factoring won’t help you. However, if your client has good credit but pays slowly, then invoice factoring could be the right solution for you.