How Can Factoring Help the Telecom Industry Cash Flow?
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How Can Factoring Help the Telecom Industry Cash Flow?

by Peter Amundson

In telecommunications, invoicing customers with net 30, 60, or 90 payment terms is standard practice. Net X days means customers have X days to pay their bills in full. Public utility providers offer these terms because it reduces the cost of disconnection and encourages customers to subscribe to their services. 

This customer’s privilege can cause financial problems for a company if its cash flow dwindles while many customers delay their payments. Telecom companies often have large reserves, but just in case they need more operating capital, telecom factoring is a sound alternative to traditional loans.

What Is Factoring?

Factoring is the practice of selling invoices at a discounted price. These invoices are typically due in 30 or more days that customers haven’t settled yet. A business can sell one or more of these invoices to factoring companies. The purpose is to get paid for the products and services they rendered as early as possible. The alternative is waiting for customers to pay after 30 to 90 days, which can be a problem for companies that need working capital now.

The payment businesses receive from factoring companies is called an advance. Factoring companies often advance 90 percent of the total invoices or higher. In exchange for their services, factoring companies charge a fee, which average around 2.0 percent of the total of the purchased invoices. 

What Is Factoring for Telecom Companies?

Any organization that provides goods or services and gives customers an extended payment period can benefit from factoring. 

Factoring for telecom companies follows the same process as any other company. A company that needs working capital can sell unpaid customers’ invoices to factoring companies who, in turn, will pay them an advance. In addition, the factoring company will take over the responsibility of collecting payment from the telecom company’s customers. 

How Can Factoring Help a Business?

Factoring benefits product and service providers in the telecommunications industry and businesses in general. Its most significant advantage is bridging the gap between pay periods when the incoming payments from customers are less than usual. Unfortunately, it can also cause problems for the company. Customers can enjoy their extended due dates, but the company has bills that must be paid within the week or month. Cash reserves can cover these payments, but using them all the time is not ideal because doing so could deplete the company’s cash flow.

A company will have a negative cash flow when the outgoing cash (expenses) exceeds the incoming funds (customers’ payments) in a single pay period. Allowing a negative cash flow to continue for too long could be detrimental to a company’s well-being. That’s why it’s crucial to find working capital to replenish reserves as quickly as possible. 

Why Do Telecom Companies Need Factoring?

Telecom factoring can provide telecom companies with working capital faster than regular bank loans. A well-funded factoring company can give companies an advance in as early as one to two days. In addition, the processing period is fast because factoring companies do not have as many requirements as traditional lenders, nor do they have very strict standards for borrowers. 

Unlike banks and credit unions, factoring companies do not require high credit scores to approve an application. Instead, they will look into the creditworthiness of the customers who have yet to pay their invoices. If they have a long history of timely payments, factoring companies will purchase their invoices and handle the rest.

This leads us to another significant advantage of factoring: it doesn’t put companies in debt. This is because telecom companies do not borrow money they would have to repay later. Instead, they receive an advance on the payments they are due to receive in about 30+ days.  

What if customers do not pay their invoices? The next step for telecom companies will depend on the type of factoring agreement they signed. 

  1. Non-recourse factoring: This agreement is where the factoring company would absorb all credit risks – meaning the telecom company is not obligated to pay back the advance if the customers do not settle their invoices. 
  2. Recourse factoring: The telecom company and factoring company share the risk burden in a recourse arrangement. If the customers do not pay their debts, the telecom company will be required to pay a percentage or the entire advance back to the factoring company. 

Around 90 percent of factoring companies only offer recourse factoring, so it’s crucial to check the terms and conditions of non-payment before signing an agreement. Of course, finding non-recourse telecom factoring and transferring all risks over to the factoring company would be better. The service fee will be higher than recourse factoring, but it might be more cost-effective than hiring a debt collection company or paying interest on a loan for months or years. 

What Can a Telecom Company Use Factoring For?

Telecom companies can use the advance they receive from factoring for any purpose they see fit. For example, paying overhead and daily operating expenses is a common use of funds from factoring. Others use the funds to invest in revenue-generating assets like new computers, sophisticated equipment or real estate. 

Companies planning to establish additional revenue streams, such as a new service or product line, can also use factoring to obtain working capital. Then, if their venture is successful, they can immediately enjoy their revenues instead of using the money to pay back a bank loan plus interest. 

This is arguably the biggest advantage of funding revenue-generating projects through factoring instead of applying for bank loans because revenues from the first two years will not be tied into repaying a large loan. Companies are free to use their income to expand and grow the business instead. 

Telecom companies can use factoring to solve cash flow problems and finance other important matters such as:

  • Making payroll on time.
  • Accepting big projects that need additional capital.
  • Funding mass hiring for urgent staffing needs.
  • Funding talent acquisition and offering competitive salaries to top talents.
  • Providing material discounts and similar offers to boost marketing.

Why Business Factors Is Right for the Telecom Industry

Factoring is an attractive and excellent alternative to traditional loans for telecom companies looking to fuel business growth or solve cash flow problems. Non-recourse factoring, in particular, is advantageous because it protects companies from the risk of non-repayment. 

To get the most out of factoring, companies need to work with an established and stable factoring company that can finance their needs and absorb financial risks. 

Business Factors & Finance is well-suited for telecommunications companies needing urgent financing and cash flow management solutions. We’ve been providing factoring services to businesses since 1999. Our team consists of factoring professionals, some of whom have over 40 years of experience in the industry. Today, Business Factors & Finance caters to various industries and offers financial services besides invoice factoring. 

Improve your cash position and obtain financing for your expansion projects with the help of Business Factors & Finance. Contact us with your questions or call 1-800-672-3844 to inquire about our services.

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About the Author:

author image Since 1991 I specialize in Invoice Factoring, PO financing and ABL facilities. I currently work internationally with companies in the US and Canada via our internet marketing division. Specialties: Accounts Receivable Factoring and Payroll Funding for Manufacturing, Oil & Gas, Telecommunications, Wholesale Trade Distribution, Staffing and Transportation. I always enjoy helping companies rise to the next level of success.

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