Winning commercial service contracts can be a challenge — whether you’re a young start-up taking steps to establish a commercial reputation and client base or an established cleaning contractor seeking expansion.
Servicing commercial accounts requires not only a competitive bid but also the working capital to maintain staff, supplies, equipment and operating expenses.
With extended payment terms common to commercial businesses, contractors often face their biggest challenge in meeting expenses while waiting out terms.
Many people think there are only a few standard options when it comes to business finance — choices like bank loans or credit cards, which can be time consuming, incur debt and be tough to come by if your business is less than three years old.
Alternatively, there is a valuable but less familiar form of financing called invoice factoring, also known as accounts receivable financing.
While factoring is a strategy that enables required cash flow, it is often overlooked or not fully understood as a means of financing.
By understanding the basics of factoring, contract businesses have access to a practical alternative to a bank-issued credit line, offering a fast, flexible resource that can reduce overall costs without incurring debt to the business.
The ‘How-To’ Of Factoring
Invoice factoring is a straightforward option that provides consistent cash flow.
It is a financial transaction where a business sells its accounts receivables (or invoices) at a discount to a factoring company (or factor), enabling the business to gain immediate access to its cash.
The factoring process starts with the seller generating an invoice for work completed.
Rather than mailing it to their customer, they agree to work with a factor and sell the invoice to them.
The factor issues a notification to the debtor (the end customer being invoiced) that payment should be issued to them instead of the seller, which results in a simple change in the “remit to” address for payment.
The factor in turn provides immediate funds to the seller in the form of a cash advance — typically a high percentage of the face amount of the invoice.
When the debtor actually pays for the services invoiced, the factor pays the seller the remaining balance (the reserve) minus its discount fee for handing the transaction.
Cash is typically delivered to the business via electronic transfer within 24 hours or less of submitting the invoice.
In addition to receiving customer payments quickly, the factor can act as your accounts receivable department and assist with back office support.
This can be attractive for smaller contract firms in particular, adding value by creating a larger business image.
Smart Financing Can Fuel Growth
Financial resources and options ensure your contract firm remains competitive and runs smoothly — yet this can be a big hurdle for young businesses.
Qualifying for a bank credit line may be difficult, as this type of financing requires financial review and is defined to a set level of spending and required payment.
Further, if your contract business does qualify for bank financing, interest fees will increase company debt.
Factoring differs from bank loans in several well-defined ways.
For example, the factor is much more concerned with the credit-worthiness of the debtor; this is in contrast to bank funding, which focuses on the credit-worthiness and total assets of the seller.
Factoring is not a loan — it is the purchase of a financial asset (your invoices), by a factor from the seller at a discount.
Start-ups qualify for factoring.
Because the process is based solely on invoices, it requires no financial review or underwriting and there are no predefined limits to factoring funds.
Contractors can choose which customers to factor and the availability of immediate cash remains in step with new contracts, ideal for any firm in expansion mode.
No interest accrues and no debt is added to your company balance sheet.
Cash Flow Impacts Everything
Expanding your business requires cash flow and the cycle of good business it supports.
Consider for example the impact of payroll requirements on business operations, including the amount and frequency of income paid to your workforce.
Your spotless reputation is driven largely by this team of good, happy employees who perform above standards.
The incentive of weekly payroll is critical to maintaining the best crews, but can take a big bite out of cash flow.
Commercial accounts can be lucrative but customers are typically billed monthly after the completion of 30 full days of service; 30-day payments terms are common, which means your contract firm may be carrying payroll for as long as 60 days.
Multiply this by the number of crews you may have working any number of commercial contracts, and your payroll requirements alone can quickly become staggering.
Other expenses beyond payroll also reinforce the need for working capital — things like maintaining storage or administrative space, payroll taxes, workers comp insurance, routine heavy equipment rental and expendable supplies like cleaners and chemicals.
When working capital is not available, these basic needs stress business operations and may even add unnecessary costs.
A cash-strapped contractor may opt out of bulk buying of cleaners and chemicals, either because the working capital is not available or simply to protect the cash flow they do have.
Working Capital Relieves Stress And Builds Business
Expanding with new service contracts compounds these issues exponentially — more crews, more operating expenses, more equipment.
It’s a good problem, but it is indeed a problem.
Options such as factoring answer the need by enabling cash flow and working capital with every new contract.
Invoice-based financing ensures that building your business is no longer dependent on what operating capital you can afford to reserve toward winning new customers.
Big expenses become less scary and there is always cash flow for payroll taxes, insurance and payroll.
Cash in hand offers a broad set of business advantages.
Meeting weekly payroll assures the best staff, which helps define your company as one with exceptional employees who always show up and do a good job.
Equipment rental is easily managed, and better prices can be negotiated on bulk expendable supplies.
Your bids can be more competitive overall; lower costs can be passed along to your clientele, differentiating your company in the bidding process.
For contract service businesses, understanding your finance options is essential for business growth.
Working capital strategies such as factoring are optimized for the contract service industry, bypassing stringent financial review and avoiding debt added to the business.
When steady cash flow is tied directly to invoiced business, contractors have a fast, flexible resource for smooth operations and ongoing business growth.
For 22 years, Tracy Groves, vice president of communications for eCapital, has helped businesses grow and reach new heights through leading edge marketing strategies. Through her work with eCapital, she’s on a mission to share innovative financing options for small to medium sized companies, enabling them to have the financial freedom to do more. Reach Tracy via email at Tracy.Groves@eCapital.com.