Unlock Cash with Construction Factoring
Construction is an industry that runs on credit. Many subcontractors often must wait 60 days or longer for payment from their general contractor. This affects their ability to pay their crew, take advantage of supplier discounts or take on new jobs. Many are utilizing construction factoring to make it through payment delays.
What is Invoice Factoring?
Invoice factoring is the discounted sale of outstanding invoices to a third party buyer. This buyer, known as a factoring company, or factor, advances their customer typically around 80% of the invoice’s face value and rebates the remainder once the invoice is paid, minus a factoring fee of usually a couple percentage points. As you can see, invoice financing provides access to immediate funding for cash-strapped businesses with money tied up in receivables. In the building industry, these transactions are known as construction factoring.
Who Benefits from Construction Factoring?
- Landscape Companies
- Roofing Companies
- Cleaning & Restoration Companies
- Property Managers
- Commercial Painters
- Metal Fabricators
- Pest Control Companies
- Well Drillers
What Makes a Good Construction Factoring Company?
Not all construction factoring companies are the same. When deciding, here are a couple things to look for:
Non Recourse Factoring
When you begin using a factoring company, you will negotiate the terms of the agreement. Operating under recourse factoring, your business sell the outstanding invoices but you are still liable for the advanced amount if the account debtor does not pay. This is also known as discount factoring.
Under non recourse factoring, construction companies or subcontractors sell unpaid invoices to a factor, who also assumes the credit risk of collection. To compensate for this risk, invoice factoring companies will charge higher factoring fees for these transactions.
It’s no secret that construction is a very cyclical industry. The sector’s fate is tied to the housing market, commercial properties and general economic conditions. According to the S&P/Case-Shiller National Home Price Index, home prices went up 75% from 1997-2005.1 And as we’ve seen, the swings in the sand states (Arizona, Florida, Nevada and California) are even more wild, some coming nearly all the way back. Today, we’re still only about halfway back to those peaks on a national basis.2
When times are in the boom’ portion of the cycle, there are too many projects to handle and staffing companies often scramble to fill new positions. But when the bubble pops, many construction companies, especially the subcontractors, are left without pay. Non recourse factoring can help mitigate the risk associated with general contractors that pay slow (or don’t pay at all). We suggest looking for factoring companies that offer this type of factoring.
Since many of the businesses that are in the construction or related fields (HVAC, drywall repair, well drillers, air conditioning, landscape companies, well drillers) are smaller in nature, there will be some significant overlap with small business factoring companies. Look for a factor that offers both small business factoring (often under $50,000 per month of invoices) as well construction factoring. That way, they are familiar with factoring invoices for small companies as well as having the necessary expertise to deal with your industry-specific needs.
Also, look out for the tricks used by some factoring companies in our Invoice Factoring Guide. Also, check through our factoring company reviews as a resource to help you make a decision. This will help you make an informed decision if you are considering factoring receivables.
Finally, look for factors that offer shorter-term contracts. While longer contracts aren’t always a bad thing (they can get you a better rate), if you are new to factoring invoices then you want to start slow. If your current factoring company is deficient in any of these areas-find a different factor!
If your subcontractor business has been turned down for a small business line of credit or a traditional loan and is experiencing cash flow issues, consider construction factoring and request a free quote today.