The Information Technology (IT) field is full of small and medium-sized companies vying for customers and for positions. Surviving in this throat industry requires owners to manage their business, especially their cash flow, with extreme care.
The IT industry is known for its heavy expenses. Payroll tends to be high because technical employees command high wages. Also, if the company also resells hardware, if it is not uncommon for equipment and inventory expenses to grow rapidly, especially if the company is involved in a large project.
On the revenue side, clients typically pay their invoices within 30 to 60 days.
Because of this, companies usually have to cover overhead and other expenses temporarily before they can get their investment back. Waiting to get paid can be a challenge for many small or midsize IT companies. In addition, several small companies have sufficient capital to handle payment delays. That means that the company could run the risk of losing suppliers or employee payments, if some clients delay payment of their invoices.
If the company has funds in the bank, a few overdue invoices won’t affect things at all. However, if the company is running lean, there are only three things you can do. You can hold off on your supplier payments until you get paid, you can try and arrange a faster payment or you can get business financing.
The Basics of Financing a Business
Negotiating payment schedules with clients and suppliers can be complex and rarely yield predictable results. Most small and medium enterprises will probably be better off getting formal financing. One of the emerging financing solutions called factoring is ideal for these situations. The invoice factor eliminates having to wait for your client to pay by giving you a funding advance on your invoice. You get a steady, predictable cash flow, which allows you to focus on running your company, rather than collecting invoices. The transaction is completed with the factoring company after your client has paid the invoice.
Invoice factors are relatively easy to qualify and are available for small and medium sized businesses. The biggest requirements to qualify are that your clients must have a good commercial credit score and your business must be free of hurdles.
Factoring can be a great solution for small and medium-sized IT companies that can’t afford to wait 30 to 60 days for their clients to pay.