Factoring Financing Articles

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.