One of the challenges of owing a technology staffing firm is that it will run into cash flow problems at one time or another. This is a common problem, especially for small companies that are growing quickly.
The most common cause for this problem has to do with the timing of customer payments. Most customers pay their invoices 30 to 60 days after services have been rendered. However, the staffing agency needs to pay their technical and engineering staff every week or two. Agencies that have a solid cash reserve will not run into problems. But thinly capitalized companies or fast growing companies can easily find themselves without available funds. If your company is not careful about this situation it could affect your ability to make payroll. And ultimately, your ability to stay in business.
Build a reserve and improve cash flow
One way to minimize this problem is to build a cash reserve that can be used as a cushion to cover operational expenses. With that in place, you will be able to handle your expenses if a client pays slowly. While building a reserve can take time, it’s important to have one. You can also improve your cash flow by asking clients to pay their invoices quickly, usually in exchange for a discount. Offering 2% net 10 is common in the industry.
Building a reserve and offering quick payment incentives will improve your ability to operate your agency. However, it won’t always protect your from cash flow problems because quick payments are often optional – and clients could always opt out. Because of this, your cash flow will still be unpredictable – but more manageable.
Improve your working capital by financing invoices
You can improve your cash flow and complement your existing cash reserve by financing your invoices. This provides your technical staffing agency with immediate cash flow to cover payroll and other important expenses. The biggest advantage of this solution is that you get most of the benefits you would get from quick paying invoices – but without requiring quick payments from your clients. It can provide predictable revenues.
Most staffing financing plans are implemented by financing your invoices in two installments. The first installment covers 90% of the gross value of your invoice and is provided as soon as the work is completed and invoices are verified. The reminder 10%, less the funding cost, is advanced as soon as your client pays their invoice on their usual schedule.
Time cards and verifications
As part of the financing process, invoices will be verified. This process is usually simple, since most staffing companies used customer signed time cards in the billing process. These time cards can usually be used for invoice verification purposes.
Costs for this solution vary based on the size of your accounts receivable and their credit quality. Most lines are priced at 1.5% to 3.5% per 30 days, though this varies.
Financing that is easy to get
One advantage of invoice factoring over other business financing solutions is that it’s easier to obtain. To qualify, your company must meet the following criteria:
- Invoices must be for completed billable hours only
- Invoices must be free of liens
- Company must be free of legal or tax problems
- Your customers must have solid commercial credit