Finding business financing for any small or medium sized company in the construction industry has always been a challenge. As an industry, construction has always been difficult to finance. This is in part because each contract carries a lot of risk since many things can go wrong. Also, each contract has many players – the project owner; the general contractor; the subcontractors ; the financing institutions; which increases financing complexity.

Although demolition companies are considered to be in the construction trade, they are not always as affected by their issues and can be easier to finance. Demolition work tends to be done at the start of the project and is not subject to the usual overruns of other subcontractors.

Most demolition companies tend to get paid 30 to 60 days after invoicing. This is a common business practice but it can create serious cash flow problems. Few companies can wait that long to get paid and still cover their own payroll, rent and business expenses. Unless the company has substantial cash reserves, it will run into problems.

Most company managers will try to cover the cash flow gap with a business loan. However, few companies can qualify for business loans in this environment. Institutions will only provide business loans to companies that are well collateralized, have strong management and have impeccable financial statements. Few demolition companies will meet this criteria.

There is an alternative that is available to most construction subcontractors. It’s called construction factoring. Construction factoring solves the cash flow problem by advancing funds against construction invoices. Instead of waiting 30 to 60 days to get paid, you get an advance from the factoring company. The transaction is settled once the GC or commercial client pays.

One major difference between factoring and a business loan is that the factoring company considers your invoice to be strong collateral, provided it’s from a good commercial client or GC. Factoring is dynamically tied to your sales, and grows as your company does.

Factoring can provide predictable cash flow to companies who cannot afford to wait up to 60 days to get paid by clients.

Trying to get business financing for a construction subcontracting business is extremely challenging and will remain very difficult for the foreseeable future. Most experts predict that it will take years for the industry to regain a stable footing in the economy. And until that happens, most institutions will be very reluctant to provide business loans to subcontractors.

Although the situation may look dire for some, there are many construction subcontractors that are doing very well in this environment. And they span the industry from cell tower construction, to demolition, to carpenters, to HVAC companies. These companies are doing well but cannot get the business financing they need simply because they are in an industry that is currently considered risky by lenders.

Most subcontractors look for business financing because they have cash flow problems that originate because they get paid in 30 to 60 days after invoicing. Basically they deliver the work, send an invoice and wait to get paid. Unfortunately, few have the capital to wait. They needs fund to pay employees, office expenses and suppliers.

One alternative to solve this problem is to use construction factoring. Construction factoring provides an advance on slow paying invoices, providing the cash flow a company needs to meet expenses while waiting for their invoices to get paid. The transaction is fairly simple, a factoring company advances you a portion of your invoice – about 75% as a first payment. Once your client actually pays the invoice, the transaction is settled and you get the reminder second payment of 25% (less the factoring fee).

One advantage of construction factoring over a conventional business loan is its flexibility. The factoring line is not fixed but rather is based on your invoices. It grows with your sales. Furthermore, most factoring companies look at the credit of your GC (or commercial customer) as one of their more important funding criteria. This makes construction subcontractor factoring an ideal solution for small and medium sized companies whose biggest assets are solid clients.

Factoring financing is an effective solution for companies whose biggest challenge is that they can’t wait 30 to 60 days to get paid by clients.

There are a number of challenges that come with owning or managing a successful sub contracting business. One of the bigger challenges involves managing slow paying customers, since they can have a negative impact on your business. For example, most of your General Contractors will want to pay you 30 to 50 days after delivering your services or finishing a stage. However, you need to pay employees and suppliers a lot sooner than that. Unless your company has a substantial bank account, you will soon run into problems unless that is managed properly.

One alternative most subcontractors try is to negotiate quicker payments from their GC’s. However, that strategy doesn’t work very often. Another strategy is to try and get a business loan from your local bank. However, most banks will not lend money to a company unless it has substantial assets and can provide financial statements showing two years of profitable operations. This puts business loans out of the reach of most sub contractors. So what alternatives do you have?

If your biggest challenge is that your clients take too long to pay, you should consider construction factoring financing. Construction factoring offers a simple proposition. The factoring company advances you up to 80% for your invoices on delivered and accepted services (or products). This provides you the necessary funds to operate your business. Once the client pays, you get the remaining 20%, less a service fee.

As part of their services, factoring companies will check the commercial credit of your customers. This helps ensure that they only finance invoices that have a high likelihood of being paid. You can leverage this service, which most factors provide for free, to help ensure that you only work with financially responsible companies. Construction factoring companies take your customers commercial credit into as one of the main requirements to qualify. That means that if you deliver quality services and work for good GC’s or builders, your chances of obtaining financing are high.

If factoring is an option you want to pursue, you should keep in mind that the factoring company will need to verify each invoice it finances. This means that they will call your customer to verify that they are happy with the rendered services. Also, be aware that factoring companies cannot factor invoices in which the GC will only pay you, if and when they get paid.

One of the biggest challenges for construction subcontractors is meeting payroll. Paying employees and suppliers is often hard because get paid 30 to 60 days after they submit their invoices.

Whether we like it or not, this is the way things are done in the construction industry. And, unless the subcontractor has a large cash reserve, waiting 60 days can be close to impossible. Especially, with the never-ending payroll responsibilities.

Going to the bank to get a small business loan or line of credit won’t help much. Banks are notorious for not lending money to subcontractors. Furthermore, banks usually require at least 2 years worth of audited financial statements showing a profit, and their loans can take weeks or months to get setup.

There is an alternative. This alternative can eliminate the payment wait and get invoices paid in a little as 2 days. Getting paid quickly allows subcontractors to easily pay employees and suppliers on time, enabling them to grow their businesses. The name of this financing tool is construction factoring, a special type of invoice factoring. Factoring receivables is an easy way to finance and grow your construction business.

Invoice factoring works as follows:

1. You send a bill to the GC or client for a progress segment or completed job
2. The factoring company advances you up to 80% of the submitted invoice. You get immediate use of the money. The remaining 20% is kept as a reserve.
3. Once your client pays the invoice, the 20% reserve is rebated to you, less a small fee

The biggest requirement to qualify for factoring financing is to do business with reputable GC’s or commercial clients and to have a well-run business. Generally, a factoring financing line can be set up in as little as 5 days.

As you can see, construction factoring provides you with a great tool to finance your growing construction business.

Running a construction company that installs underground utilities or over ground cables can be very profitable. Most of the times, the clients are top rates companies such as major utilities or cable operators. Although profitable, keeping enough working capital to meet payroll and other obligations can be challenging. Especially since cable companies and utilities tend to pay their invoices in 30 to 65 days. Few cable installers can wait that long to get paid. For starters, they need to meet payroll which is usually weekly or bi-weekly. Then, there are also suppliers that need to get paid.

Is getting a business loan solution? Not always. First, getting business loans is particularly difficult in the current banking and credit environment. Second, although small business loans can be a great tool for business financing, they are not always the best solution to a problem. Let’s examine the situation in more detail.

Most cable installers, especially startups or rapidly growing companies, run into the following situation. They get a lucrative contract to perform a job that stipulates that the installer can bill regularly, usually weekly, based on the length of installed cable. Now at the end of the week, the installer can bill the client but will also need to pay all of his employees. However, payment from the client will not come until the following month, so he will need to pay employees out of savings. Unless your business has a substantial bank account, sooner or later you will start turning projects down or you will run out of money.

But what would happen if your clients paid you in 2 days, rather than 2 months? Then you would not have these problems. You’d be able to run your business efficiently and grow it when new opportunities come by. Although you cannot make your clients pay sooner, you can achieve the same results by using construction factoring.

Accounts receivable factoring provides a very simple proposition. As soon as the work is completed, you can sell the invoice to a factoring company. The factoring company buys your invoices in two installments. The first installment, called the advance, will cover about 80% of the invoice’s amount. The second installment, paid to you once the client pays for the service, covers the remaining 20% (less a small fee). A small fee is subtracted from the second installment to cover for the cost of the service.

One of the advantages of working with factoring companies is that construction factoring is much easier to obtain than conventional financing. Furthermore, the size of your financing line is tied directly to your sales and therefore grows with your business. This makes it an ideal solution for small and growing businesses.