The construction industry has recovered remarkably since the recent economic downturn. No longer are people reluctant to build new homes and office buildings. As the economy improves, they are ready to hire you and your construction company for their upcoming projects.
When you want to ensure that you have enough cash on hand to keep your company functional, you may consider factoring as a source of financing. Before you factor your invoices, however, you should understand how this type of financing works for construction companies, and how it can benefit your business.
Advantages of Construction Factoring
In many key ways, factoring works for construction companies the way it does for any other business. It offers the same perks that make it attractive, but also proves easier than taking out a bank loan.
Factoring is the process of selling some or all of your unpaid invoices to a financier known as a factor. The factor pays you up to 80 percent of the invoice's face value and holds the remaining 20 percent in reserve. Once your clients pay their accounts receivable, the factor then pays you the remainder, less the fees it charges for its service.
Some of the better-known advantages that come with factoring for any business include:
Faster and easier approval for financing: A factor can approve your application in days rather than weeks. You can get approved with bad credit or even a recent bankruptcy if your clients have good credit and good payment records.
More money upfront: A bank will limit the amount of funds you can receive based on your credit score, how much money your business makes, and other information. You may be able to receive more money with factoring, particularly if you sell multiple invoices at one time.
Costs can be lower: The only costs you pay are the discounted rate at which you sell your invoices and the fees charged by the factor. Many times, these costs are lower than a bank's loan APR.
Freedom to use cash for any purpose: A factor will not restrict you in how you use your cash. You can use it for your cash flow, to buy inventory, paying your employees, or a host of other purposes.
Considerations for Construction Factoring
Even with these advantages, you still should understand how factoring can be a unique proposition for construction companies. Given the complexity of this industry, for example, you would do well to find a factor that has prior experience financing construction companies, and understands the circumstances that can affect how clients pay their invoices.
A qualified factor will take into consideration contractual restrictions like "paid if paid" and "paid when paid." These details could introduce variables like disputes, charge backs, and other circumstances that could delay how quickly the accounts get paid.
Likewise, an experienced construction factor will understand and be able to accommodate exceptions like retainage payments. These payments, which can total up to 10 percent, are often held in reserve to address issues like disputes and other problems.
Experienced consideration factoring companies should also be able to determine whether or not you would do best with recourse factoring or non-recourse factoring. Depending on the type of projects your company is handling and the financial stability of your invoice clients, the factor may insist that you use either recourse or non-recourse factoring. Determining what option is best for you, however, requires that the factor understand the difference among the various construction projects that are common with this industry.
As the construction industry enjoys its rebound after a difficult recession, you can make sure your company is ready to serve your clients by using factoring to improve your cash flow. This choice calls for you to know its benefits and how your industry can impact your funding.
