Factoring Blog

Business Financing for Subcontractors in the Oil and Gas Industry

August 18, 2011 By

Most subcontractors in the oil and gas industry have enjoyed a number of good years, despite the recession. However, many large oil and gas clients have grown more conservative in the expenditures and have started to take longer to pay their invoices. Companies that paid in 30 days are now paying in net 45. Those that used to pay in net 45 days are now paying in net 60 days. This has created a challenge for many of the smaller providers, who don’t always have the resources to wait a long time to get paid.

Smaller subcontractors in the oil and gas industry have been focused on growth and don’t always have the necessary cash cushion to absorb slow invoice payments. This puts business owners in a difficult position where they have to  deal with their cash flow problems by either delaying expenses or asking customers for prompt payment. These strategies usually work – at least for a while. However, delaying expenses and demanding quick payments won’t always work for the long term. A better solution is to bridge the cash flow gap using business financing.

There is a solution that has been gaining notoriety in recent years that is designed specifically to fix the cash flow problems created by slow paying invoices – it’s called invoice factoring. It enables small businesses to get quick payment for their invoices, providing the needed funds to meet current expenses and new growth investments. Factoring is specifically designed for small businesses so it’s easier and faster to obtain than conventional financing.

Factoring works by using a financial intermediary, called a factoring company, that buys your invoices and pays you upfront for them. This gives your company the funds it needs to operate while the factoring company holds the invoice until the customer pays. Once the customer pays, on their usual schedule, the transaction is settled. A key feature of factoring is that your customer does not have to pay sooner – they pay on their usual terms.

Qualifying for factoring is relatively easy. The biggest requirement is that your company needs to work with credit worthy customers. Most of the larger operators in the oil and gas industry have stellar credit, so this should not be a problem. Aside from that, your company needs to be free of legal and tax problems. Most factoring companies can approve a factoring line for initial funding in about a week or two.

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Business Financing For Logistics Companies

August 15, 2011 By

Most successful logistics companies are very good at managing and juggling the demands on their cash flow. One one hand you have expenses – there are drivers that need to be paid, fuel that needs to be bough and trucks that need to be maintained. One the other hand you have income, which are usually your invoices. The problem that most transportation companies find is that expenses tend to happen regularly and are immediate while income is always delayed because customers pay in 30 to 60 days. This mismatch in timing between income and expenses is at the heart of most cash flow problems for logistics companies. And this is a problem that can be solved easily – for most.

There are a couple of ways to deal with these cash flow problem. One way is to delay payments until your invoices are paid.  This can work for some, but it can create substantial problems if you face expenses that can’t wait. Another strategy is to ask customers to quick pay their invoices / freight bills. Quick payments can work well, but they still leave you at the mercy of your customer. A third approach is to use business financing to cover expenses while waiting to be paid. Using business financing can create the financial buffer you need to operate and grow your business.

There is one business financing solution that is designed specifically to help with slow paying invoices- it’s called invoice factoring (often referred to as freight bill factoring in the logistics and transportation industry).  It offers a simple solution to the problem – you get a quick payment for your invoice from a financial intermediary called a factoring company. The factoring company holds the actual invoice/freight bill until your customer pays – which settles the transaction.

One of the advantages of factoring freight bills is that is easily accessible to small and mid sized logistics companies. The most important qualification requirement is that you need to work with commercial credit worthy customers who pay their invoices reliably (although slowly). Aside from that, your company must be free of legal and tax problems.

Freight bill factoring is an ideal solution for companies whose biggest problem is that they can’t afford to wait up to 60 days to get paid by their customers.

Filed Under: Transportation and Freight Tagged With: , ,

Business Financing for Staffing Agencies

August 12, 2011 By

Many entrepreneurs gravitate towards starting staffing agencies because they are thought to be less capital intensive than other industries. The concept is that you only hire the employees you need them, when you need them and only to handle the contracts that you have. Although in principle this sounds enticing, the reality is that staffing agencies do require a substantial investment (or at least business financing) if you plan to grow them. This is because income and expenses are usually mismatched.

What do we mean when we say that staffing agency income and expenses are mismatched? Well, most staffing agency employees need to be paid every week (or every two weeks) through payroll. However, most staffing agency customers pay their invoices on net-30 or net-60 day terms. Said simply, expenses are fairly immediate but your income is delayed by 30 to 60 days. This means that the company needs to cover payroll from its own reserves while waiting to be paid. And if you run out of reserves, your company will be in trouble – or at the least – it wont be able to take on new clients.

There are two ways to approach this problem. One way is to ask customers to pay quickly. However, this is often difficult as large customers usually like to be able to pay their invoices on net 30 to net 60 terms. Another approach is to accelerate your customer payments using a factoring program for staffing agencies. This program uses a financial intermediary that advances you funds based on your open invoices to credit worthy customers. You get paid by the factoring company (financial intermediary) immediately – who then holds your invoices until they get paid by your end customer.

One of the advantages of factoring is that it is easier to obtain than other forms of business financing. The most important requirement to qualify is that your customers have good commercial credit. This is important because factoring companies consider your invoices to be your most important asset. Aside from this, your company needs to be free of legal and tax problems.

Working with a factoring companies can be an ideal solution for a small or medium sized staffing agency whose biggest problem is that it can’t afford to wait up to 60 days to get paid by customers.

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A Business Financing Alternative For Companies that Can’t Get a Business Loan

July 12, 2011 By

Although the recession officially ended a few years ago, the economy is still reeling from the economic  after-shocks of the credit bubble. One of the most difficult challenges that small business owners are facing is the lack of conventional business financing options – namely business loans and lines of credit. Most lending institutions have sustained substantial financial problems due to the recession and are unable (or unwilling) to extend loans to small businesses, save those with the best collateral and performance history.

Businesses owners, on the other hand,  have their own set of problems because cash flow is unusually tight. Customers that used to pay in 15 or 30 days are now taking up to 60 days to pays their invoices. However, small businesses still have to pay employees and vendors on a timely basis.  This creates a situation that forces managers to juggle payments between  vendors. To complicate matters, many small businesses are turning away new orders simply because they are unsure if their cash flow will allow them to service the client properly. This create a vicious cycle that can send the business into a tail spin. Recovering from that tail spin is critical if the business is to succeed.

There is one way to break this vicious cycle, and that is to use business financing to strengthen the company’s cash flow. This will enable the business to take on new orders and to grow. Financial institutions will only extend funding  to companies that have substantial assets and solid cash flows. Furthermore, many will require that you show two years worth of financial statements showing solid growth. In this post-recession economy, few companies can meet these criteria. For many, the only option is to use an alternative source of financing. One alternative product that has been gaining traction in the past few years is invoice factoring.

Invoice factoring is designed to solve the cash flow problem that is created by slow paying customers. It accelerates the receipt of cash, providing the liquidity a company needs to cover current business expenses. By implementing a factoring solution, a company can eliminating the conventional net 60 day wait for payment. This allows the company to make business decisions based on the potential of a customer, rather than their payment habits.

Accounts receivable factoring works by using a financial intermediary between your company and your customer. The intermediary, called a factoring company, buys your invoices and pays for them immediately.  This provides your company with the needed liquidity to operate and grow.  The transaction is then settled once your customer pays the invoice in full, usually 30 to 60 days later.

Most factoring financing transactions are structured as the purchase of an invoice on two installments.  The first installment, called the advance, is given to your company as soon as the work is completed and you invoice your customer. The advance is sent to your company by bank wire or by using a direct deposit as soon as the invoice is verified. The advance is determined as a percentage of the invoice, and usually  averages about  80% of your invoice. The remainder 20%, less financing fees, as rebated to your company as soon as your customer pays the invoice in full. The rebate settles the transaction.

As opposed to other forms of financing, factoring is widely available and relatively easy to obtain compared to other forms of funding. To qualify for factoring your company must work with credit worthy customers and to be free of major problems, like liens and judgments.  Customer credit worthiness is particularly important because the whole premise of factoring involves leveraging your customers commercial credit to your own advantage. This makes invoice factoring an ideal solution for small and midsized companies that have a solid roster of customers and whose biggest challenge is that they can’t afford to wait 60 days for their customers to pay.

 

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