As a the owner and manager of a security guard company, you know that managing the working capital resources of the business can be very challenging. You need to carefully manage the cash inflows and outflows to ensure that it always has the resources to cover operating expenses. One clear example of this is making sure there is enough money to cover payroll.
It’s all about payroll
Most security guard agencies need to pay their guards on a weekly or biweekly basis. However, most agency customers – such as companies, malls, and other venues – pay their invoices on net 30 to net 60 day terms. These are standard commercial terms and as a security business you have to accept them. The problem is that many security companies that don’t have the resources to wait this long to get paid. This means they can run into working capital problems if they don’t manage things correctly. If left unchecked, these working capital problems can grow and threaten the stability of the company.
Funding payroll by financing invoices
One way to address this problem is to use the business financing tool called invoice factoring. It solves the problem in a very simple way. A factor, which is a financial intermediary, advances funds to the security guard company and holds the slow paying invoices as collateral. This provides your security agency with the working capital it needs to meet payroll and other important expenses. The transaction settles once the end customers pay their invoices on the regular schedule.
Usually, receivables finance transactions are structured as the purchase of an invoice in two installments. The first installment, which covers about 90% of the accounts receivable, is provided as soon as the work is completed This is usually verified by looking at the employee time cards. The second installment, which covers the remaining 10% (less the fee), is advanced once the end customer pays the invoice in full.
Two possible options
Most invoice financing plans are offered in two possible variations – called recourse and non recourse factoring. The main difference between these two solutions is that in recourse factoring, your company is liable is your customer does not pay their invoice. On a non-recourse facility, your company will not be liable if your customer does not pay due to a declared insolvency during the first 90 days of the finance period. However, in non-recourse agreements you are still liable if the insolvency happens after the 90 days, or if your client does not pay due to other reasons. Which type of financing you choose if a matter of personal preference and should be determined with the help of a financial adviser. However, keep in mind that factors will review the credit worthiness of your clients before buying an invoice and it’s unlikely they would purchase an receivable that had a high chance of default.
How do I get it?
Qualifying for invoice factoring is easier than qualifying for other financial products. The most important requirement to qualify is to have credit worthy commercial security customers. This is critical to because the credit worthiness of your security customers is the collateral that the factor is relying upon. Aside from that, your security guard agency also needs to meet the following requirements:
- Your invoices and time cards need to be for completed work
- Your invoices need to be free and clear of liens and encumbrances
- Your company must be free of legal and tax problems
- Management must have experience in the security industry
Perhaps the most important advantage of using invoice factoring financing for security guard companies is that it provides a flexible financial solution. The line is designed to be dynamic and can grow with your revenues, provided that your company meets the funding criteria. Because of this, invoice financing can be a great financial tool for growing security guard companies that have great opportunities but are being held back by working capital problems.