Summary: Many small vegetation management companies face cash flow problems during the busy summer season. These problems often arise due to the timing gap between paying expenses (e.g., payroll) and getting paid by clients.
This article explains how invoice factoring can help you improve cash flow and cover payroll and other expenses. We also discuss key differences between financing conventional invoices and financing invoices related to utility storm-response projects. The article covers the following:
- Slow payments affect payroll
- Improve cash flow with factoring
- How does factoring work?
- Utility storm-response issues
- Advantages of factoring
- How to evaluate factoring companies
1. Slow payments affect payroll
Many electric utilities outsource some or all of their vegetation management to specialized contractors. These contractors have the right staff and equipment to maintain vegetation.
The vegetation management contractor typically invoices the utility for completed work and gets paid on net-30 to net-60-day terms. Offering payment terms is common in the industry. However, terms can create cash flow problems for some contractors.
Contractors with tight cash reserves may face challenges with business expenses such as payroll. These problems may worsen in the busy summer season or during storm preparedness and response projects.
a) Is financing the right solution?
The simple solution to this problem is to use a line of credit to handle expenses. The line helps you bridge the gap between invoicing and payments while allowing you to build up your reserves.
Unfortunately, getting a line of credit is difficult. Lines of credit have stringent qualification requirements and take time to deploy. Furthermore, increasing the credit limit is difficult. This financing solution can be challenging if your business is growing quickly.
One way to improve your cash flow is to use invoice factoring. This solution can provide funds to cover expenses and is more flexible than bank financing.
2. Improve cash flow with factoring
A factoring line finances your invoices that are payable by electric utilities. This facility provides funds immediately, so you don’t have to wait 30 to 60 days to get paid.
Your company can use these funds to cover payroll, equipment costs, and similar expenses. A factoring line is easier to get than a line of credit. This makes factoring an alternative for vegetation management companies that need to improve cash flow quickly. To learn more, read “What is Factoring?”
3. How does factoring work?
A factoring line is not a loan. Instead, you sell your invoices to a factoring company in exchange for an immediate payment.
The factoring company buys your invoices based on their credit quality. This distinction is important because electric utilities typically have excellent business credit.
Most transactions have two installments. The first installment covers 85% of the invoice’s value and is called the advance. It is deposited into your account shortly after the invoice is verified.
The remaining 15%, less the factoring fee, is deposited into your account once the electric utility pays the invoice. This deposit settles the transaction.
You can use the line as often as needed. It works much like a revolving facility that provides liquidity to cover essential business expenses. Read “How Does Factoring Work?” to learn more.
4. Utility storm-response issues
Electric utilities typically ramp up staff as part of their storm response and preparedness efforts. These ramp-ups can happen quickly as the utility assembles personnel in staging areas and prepares a response.
There is one important difference in the storm response industry. Some electric utilities get their crews by working directly with the vegetation contractors. Other utilities work through brokers.
Brokers hire vegetation management crews from several companies and then subcontract these crews to the electric utility.
This difference between these two ways of doing business is important. It affects your ability to work with a factoring company.
a) Direct contract with the utility
The simplest transactions are those in which the vegetation management company has a direct contract with the electric utility. These transactions are straightforward and work like any conventional factoring transaction.
b) Contract with a broker
Transactions in which the vegetation management contractors work through a broker are more complicated. This is because your contract is with the broker rather than the utility. The utility is only the end customer.
This distinction may seem small, but it is important. For the most part, the creditworthiness of an invoice is determined by the payor. In this case, the payor is the broker. This type of transaction has a much higher risk for the factoring company. We have found that these transactions are very difficult to finance successfully.
There are ways to limit the risk and handle these transactions. However, they require substantial cooperation from your brokers and your willingness to take a lower advance.
5. Advantages of factoring
Factoring has several advantages over conventional financing lines. The following are the most important benefits:
a) Improves cash flow quickly
Factoring lines are designed to improve your cash flow quickly. They can help small businesses with open invoices that need working capital immediately.
b) Adapts to growing demands
Factoring lines are designed to adapt and grow quickly. This is an important feature, especially for companies that handle storm response, where invoices can quickly climb to a few hundred thousand or even millions of dollars.
c) Simple qualification
Factoring has simpler qualification requirements than other solutions. This simplicity makes factoring an ideal option for small vegetation management contractors who cannot qualify for conventional bank financing. To qualify, your company must have:
- Creditworthy invoices
- Good procedures
- No encumbrances
6. How to evaluate factoring companies
Choosing the right factoring company is essential to the success of your business. Interview each company carefully. Consider evaluating them in these areas:
a) How long have they been in business?
Work with a factoring company that has been in business for a few years. Ideally, a decade or longer. Longevity shows that they can manage a portfolio of clients during different economic cycles.
b) Do they have experience in the vegetation management industry?
You are better served by a factoring company with experience in the utility vegetation management industry. They are familiar with the industry’s invoicing practices, paperwork, and payment processes.
c) What is the size of their largest financing line?
Select a factoring company that can scale up their facility to match the size of your maximum invoicing need. This point is important if your company ramps up during the summer or handles storm response. The last thing you want is to reach your factoring credit limit in the middle of your busy season.
Get more information
We are a leading factoring company and can provide you with competitive terms. For more information, get an online quote or call us toll-free at (877) 300 3258.