Payroll is probably one of the most important expenses for a technology consulting company. Employees are the company’s most valuable asset and making sure that there paid on time is critical for the success of the business. For many companies, making payroll can require some financial juggling. This is because employees need to be paid on a weekly or biweekly basis. However, most technology customers get payment terms for their invoices. Therefore, they get 30 to 60 days to pay their invoices. In the meantime, the consulting company has to cover all expenses while it’s waiting to get paid.
Two bad options
While this is not a problem for companies that have a line of credit or have some accumulated cash reserves, this can be a serious problem for growing companies that don’t have the resources. Companies that can’t afford to wait for payment usually have two options – neither of which is good. The first option is to keep taking jobs and risk running into working capital problems. For these companies, getting into financial difficulties is only a matter of time. The second option is to simply turn away some customers, especially those that demand payment terms. Recently, a third option has been gaining traction. The option is to finance your invoices.
A third option – finance your invoices
Factoring invoices reduces the time between invoicing a client and receiving revenue for your invoices. It does not require your customers to pay sooner though. Rather, a factoring company advances funds to your technology consulting business using your invoices from credit worthy customers as collateral. This provides you with the funds you need without having to worry about slow paying clients. The transaction is settled once your end customer pays on the usual timetable.
How does it help your business?
Most accounts receivable factoring transactions are structured as a purchase of accounts receivable in installment payments. The first installment is called the advance and covers anywhere between 80% and 90% of your outstanding accounts receivable. This is provided to your company as soon as you invoice your customer and the invoice can be verified. Your company gets the second installment, which is the remaining 10% to 20% (less the factoring fee), once the invoice is paid in full.
Factoring companies are used to working with growing technology consulting companies therefore factoring lines are very accessible. The most important requirement to qualify is that your customers must have good commercial credit. This is critical because the whole transaction hinges on your customers ability to pay their invoices on time. Aside from that your company has to meet the following requirements:
- You must invoice for completed and delivered work
- Your invoices must be free and clear of liens and encumbrances
- Your company must not have any legal or tax problems
One important benefit, especially for technology companies, is that you get financing without giving up equity to a venture capitalist or angel investor. Likewise, it’s an alternative to private financing, where friends and family fund your business. Additionally, the financing line is designed to grow organically, with your sales. It will adapt to increased sales and grow as needed. This makes receivables financing a perfect solution for growing technology consulting companies that have opportunities that are being hindered by working capital problems.