If there's one thing most MSP business owners will agree is at the top of the list of frustrations about running our own companies, it's got to be the money aspect of it. Not the money we get; that's one of the reasons we run our own business in the first place, after all.
What's frustrating is that time between finishing the work... and getting paid for it. Most clients want to be invoiced monthly, but when times are lean - and those times are frequent in the current economy - they also expect to delay payment by a few days or even weeks while they weather a downturn in business.
So even if you're extremely reliable and deliver your invoices to the clients on the first of the month like clockwork, you're likely going to be waiting a while before that invoice is paid. And since you've got financial responsibilities of your own to cover, it's important to have some amount of certainty that you know precisely when the money is going to be available to meet those responsibilities.
The good news is that there's an entire industry based on this concept; somewhere between the level of a full-blown accounting firm, which may be too expensive or complex for your specific needs, and a collections agency - which only comes into play long after the fact, when deadlines are already missed and you're already in a financial bind.
Factoring companies make a business of purchasing your receivables - often paying 85% or more of the invoice you generate, the very same day you've generated it. Once the client has delivered the full payment, the factoring company subtracts their own fee from the remaining 15% of the invoice... and delivers you the balance. Fees can vary, but are typically lower when invoices are paid rapidly by the client - and generally amount to less than 2% of the invoice, no matter how derelict the payment may happen to be.
Isn't it worth two percent of your invoices to know exactly how much you'll receive on a specific date? And that doesn't even begin to consider the joy of not having to make the collection calls. When clients are slow to pay, the factoring company will make the initial efforts to collect the debt in a professional and effective manner.
Of course, factoring companies ultimately are not collections agencies, and if an invoice is left unpaid for too long of a time you will need to repurchase that invoice and find a way to resolve your issue with the client on your own.
You could also simply "flip" the invoice to a separate collections agency for more aggressive collection efforts.
If you're a managed service provider that charges a flat monthly fee, factored receivables are also a great way to generate additional income outside of that - when a client wants some special service that might fall outside of your standard maintenance agreement... such as an installation of a unique piece of hardware for example... that client may expect to pay the invoice at the beginning of the month along with the recurring invoice.
With a factoring company in the picture, you can have the invoice for your extra service funded as soon as you complete the work, even though the client hasn't paid it yet... and won't pay it until the start of the next month.
The ability to manage your cash flow is essential to the survival of your business, and hiccups or delays in that cash flow are particularly troublesome when your business is just starting out... or, as in many hardware-focused operations, operates on very slim margins. By incorporating factored receivables into your company's accounting, you can avoid many of the more troublesome issues with collecting from your clients, and concentrate instead on simply providing the best service possible.