Invoice Factoring For Your Security Guard Agency

Have you ever asked yourself “How am I going to make payroll this week?”  If you own a security guard agency you probably have.  If you own a security guard agency and you haven’t, you’re probably new and this article on invoice factoring is meant for you.
I remember the first time that I realized paying the bills had less to do with profitability and more to do with cash flow.  When you issue an invoice to your customer, your customer typically has 30-60 days before they pay that invoice.  But while you are waiting for the check, you have expenses to pay, namely payroll.  So how do you cover those expenses before you receive your customers payment?  The traditional answer is with a bank line of credit.  But for many small companies in today’s economy getting a loan from a bank is very difficult.  According to an article in the Wall Street Journal, banks are trying to clean out and fix their balance sheets so the standard to have a loan approved is higher than in past years. So as an alternative to a bank loan consider Invoice Factoring.

What Is Invoice Factoring?

Invoice Factoring, is also referred to as receivables financing or receivables funding.  Factoring provides smaller and early-stage businesses with faster access to the money trapped in their accounts receivables.  Invoice Factoring differs from a bank loan or line of credit in several ways:

  1. Where a loan from a bank loan would be between you and the bank, factoring involves you, a factoring company, and your client.
  2. The emphasis for the financing is placed on the value of the receivables, not the credit worthiness of the borrower.
  3. Factoring is not a loan, rather it is the purchase of an asset.  In the case of a security guard agency, that asset would be the invoice that you send to your client.

So how would the factoring process work for you?  Invoice factoring is a 3 stage process.  First, you would sale an invoice and transfer ownership of the receivable to the factoring company.  Second, the factoring company would pay you a percentage of the invoice’s face value (up to 90%). The 10% that is kept by the factor is known as “The Reserve”.  Third, once the client submits payment to the factoring company, they release the reserve minus a “discount” (fee).
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Invoice Factoring Pros & Cons

As with most things, there are pros and cons to invoice factoring. Here is a short synopsis of both:

Pros

  • Factoring gives you access to working capital much faster than waiting for your clients to send payment.
  • It’s easy to qualify.
  • They can follow up with your customer to collect payments on your behalf.
  • Factoring creates no new debt.

Cons

  • Invoice factoring is much more expensive than a traditional loan or line of credit.
  • You must have a good understanding of the fee structure for your factoring agreement as they can sometimes be vague.
  • Each factoring company’s requirements will vary wildly, so make sure to shop your deal around.

Before deciding whether or not you should factor your invoices, carefully weigh out the pros and cons.  Although factoring can be a real life saver, it is definitely not right for everyone.  Have you used a factoring company before?  If so what was your experience?  Do you have any tips for someone looking to do invoice factoring?  Please leave your comments below.
By Courtney Sparkman

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