Unpaid construction invoices can be a real drag on a subcontractor’s business. You may be offering Net 30 terms, but many general contractors may take up to 60 or even 90 days to pay. When you have employees to pay and materials to buy, this is simply unacceptable. Fortunately, construction factoring can provide relief.
How does construction factoring work?
Factoring construction invoices is quick and easy. Most lenders will advance 70-80% of the invoice amount when its submitted. The funds can hit your account within 24 hours in some cases, making factoring a useful service when in a cash flow bind.
When the general contractor pays the invoice, the construction factoring company will forward the remaining 20-30% of the face value, minus their fee.
How does it help your subcontracting business?
There are numerous other benefits that construction receivable factoring besides the immediate cash flow.
- Quick and easy. It can help fund your business in a bind
- Extend credit to your customers with confidence
- Easier to obtain than traditional business loans
- No monthly installments to pay back
- Allows you to better allocate your capital towards growing your construction business
Disadvantages of factoring
There are some disadvantages that must be mentioned. The major one being the cost. Construction factoring fees are very high when you calculate and compare them to a traditional bank loan’s APR rate. There is much controversy about the service, but it provides a valuable service in the business world, and it utilized by many. Other disadvantages:
- Potentially locked into a long term agreement
- May be required to factor all receivables from a specific company
- Transaction fees and other hidden fees are common
How does my business qualify?
Fortunately, construction receivable funding is much easier to qualify for than traditional bank loans. This is because qualification is dependent on your customer’s credit history rather than yours. Other qualification factors require your business to be healthy (i.e. free of tax liens, legal problems, etc.) and experience in the construction industry is also preferred.
Who uses factoring?
Factoring is present in virtually all industries. From construction to trucking, manufacturing, and even staffing agencies factor their invoices. It is a flexible financial product that can help fund a startup company, or an established business that may just be suffering from seasonality. Some other industries include:
- Food and beverage
- Government contractors
How to choose the right construction factoring company
As always, you should do your proper due diligence before selecting a factoring company. Some questions to ask include:
- Are there any long term contracts or agreements?
- Do I have to factor all of my construction receivables?
- Are there any minimums?
- What is the advance rate?
- What is your fee?
- Are there any transaction fees? (ACH, Wire, etc.)
Construction factoring is a great solution for subcontractors that need to meet their financial obligations fast. Funds can be received in as little as 24 hours, it’s easy to qualify for, and it helps you grow your business.