Subcontractors often have to run their businesses on very small profit margins. They have sizable payroll obligations to meet on a weekly basis but they may not receive payment from general contractors or clients for up to two months. In the meantime, these professionals may also have to pay for necessary work equipment and other business expenses. How can subcontractors continue to meet their regular expenses while they wait to receive payment from their clients? One avenue is construction factoring, an arrangement that provides financing for subcontractors.
Possible Financing Problems for Subcontractors
Why do subcontractors need construction factoring? For one thing, it's very difficult for subcontractors to get financing through a traditional bank loan. Lending institutions are often hesitant to offer financing to businesses in the construction industry unless the company can show several years of profits and a good credit history. This may be difficult for subcontractors who have not been in business for long or for those that have recorded company losses in the past. In addition, even subcontractors who are approved for bank loans may have to wait weeks or months to establish their accounts and get access to the funding. Often, company expenses such as payroll cannot wait that long to be settled.
About Construction Factoring
Construction factoring is a three-way transaction between the factoring company, the business and the client. The factoring company agrees to advance the business the bulk of the client invoice upfront. Afterward, the factoring company accepts the responsibility of collecting on the invoice from the client and remits the remaining part of the invoice to the business (minus their fee) after the customer pays the invoice in full. Construction invoice factoring is not a loan which means that subcontractors don't have to pass a credit history check to qualify for it. Since the factoring company also agrees to perform the collections on the invoice the subcontractor can avoid doing accounts receivable work and focus on finding new clients.
How Construction Factoring Works
A typical construction factoring transaction begins when the subcontractor sends out an invoice for a completed job. The factoring company then sends out about 75 percent of the invoice total as an advance to the subcontractor. The subcontractor can use those funds for any business purpose he or she chooses. In the meantime, the factoring company begins collecting on the invoice. After the customer pays the invoice the factoring company submits the remaining 25 percent of the invoice to the business after deducting their factoring fee.
Subcontractors who need quick access to company financing don't have time to establish a credit history or wait for a bank loan. Construction factoring offers fast and easy financing for subcontractors and their businesses.