Can Invoice Factoring Help Your Construction Business?
Construction companies face a lot of upfront expenses. If you’re waiting 30-90 days to be paid for a project, then you know that covering payroll and paying for supplies, equipment and materials can be a challenge. For a small or expanding contractor without enough cash reserves, financing project costs can feel like an impossible task. Whether you are rapidly growing, struggling with payroll expenses, or having trouble taking on bigger contracts, construction invoice factoring can help.
No longer will the sub-contractor, or construction company, have to wait for payment before starting on the next phase of a project, or begin construction on a new project. Invoice financing allows the contractor to realize a quick turnaround on accounts receivable due for completed stages of a construction project.
If you bill your services to general contractors, commercial customers, or government entities, and they pay in 30, 45, 60 days or more, invoice factoring is a great working capital solution. This flexible type of financing works well for construction businesses of many different ages and sizes, as long as you have qualifying invoices. Many factoring companies will even work with you if you’re a startup.
How does it work?
A factoring company buys your open invoices and then advances you the cash (70-90% of the invoice amount), minus a small percentage. In most cases, you’ll receive a cash advance in less than 24 hours. The customer pays the invoice amount to the factoring company at the terms you previously agreed upon. Once paid in full, the discounted amount (the remaining 10-30%) is returned, less a minimal factoring fee for services provided.
Qualifying for invoice factoring is easier than qualifying for long term financing, like term loans and lines of credit. While credit scores, annual revenues, and profitability can be significant hurdles for other types of financing, those are less often an issue with invoice factoring. Most factors care about three primary qualifications:
1) You must invoice business (B2B) or government (B2G) customers. Your customers must have good credit scores and they must be established businesses. The factor will need to feel comfortable that your customers are likely to pay off your invoice. Pay-when-paid contracts and progress billing is fine.
2) The invoices must be due and payable within 90 days and unencumbered by other loans.
3) Your business should not have a history of serious tax or legal problems.
How can it help your business?
Immediately improve your cash flow
No recourse even if the account does not pay
Credit insurance on your clients at no cost to you
No arbitrary loan board decisions
No fixed payments
As sales and receivables increase, funding increases
Focus on your business, not collections
Take advantage of early payment or bulk purchase discounts from your suppliers
Ability to start new or large projects
Accounts receivable financing is more flexible and quicker than bank loans
Give Dave Webb a call at 239-247-1096 for further details on our invoice factoring programs for contractors.