If you're in the construction business you likely know that a thin profit margin is par for the course. Many construction companies and contractors operate in the red for the first few years due to late payments from clients and rising operation costs. Even businesses that are profitable may run into difficulty meeting their obligations from time to time if their clients take a long time to pay. Some construction businesses don't receive their payments for over two months. If this is happening to you, how can you get the cash you need to keep your business afloat? The answer is construction factoring.
What Construction Factoring Involves
Finding sources of financing is often hard for people in the construction industry. Traditional lenders may be less likely to lend money to you unless your business has demonstrated a long history of profitability. Most small businesses cannot pass this test. However, construction factoring is different.
Factoring is not a loan, so you won't need to apply for financing nor will you need to submit to a credit check. Factoring enables construction companies to have access to funds on a fast timeline (often within 24 hours) so you can focus on operations instead of waiting for customer payments.
Construction factoring involves selling a factoring company the value of your outstanding invoices. In return, the company will advance you the bulk of the invoice value (generally up to 80 percent). You can then use these funds for any necessary business expenses such as payroll, utilities, repairs or equipment. The factoring company assumes the responsibility for collecting on the invoices. Once your customers pay off the invoices, the factoring company will send you the remaining 20 percent of the invoice value minus a fee of a few percentage points.
Benefits of Construction Factoring
There are many benefits to using construction factoring for your business. As discussed earlier, making use of construction factoring doesn't involve your business or personal credit, so you can keep building your credit history without having to open a new line of financing. When you sign up for construction factoring you're also able to save yourself the trouble of keeping up with the accounts receivable information for that client. The factoring company will perform the collection work allowing you to concentrate on other parts of your business.
Factoring can also lead to improved cash flow, increased flexibility in budgeting, access to additional working capital, protection against delinquent payments, and improved company reputation. Factoring allows you to receive the funds from your invoices within a few days instead of weeks or even months, as is the case with traditional invoicing and collection processes. This can lead to increased sales and profits, as you can better manage cash flow and quickly take advantage of new business opportunities.
Additionally, by factoring invoices, you may be able to obtain additional working capital to pay for materials, labor, and other operational expenses, something they may not have been able to do without the additional funds. Factoring offers increased protection against delinquent payments because payment is received as soon as the invoice is sent, and the factor takes on the risk of collecting the debt. Finally, if you are able to quickly pay vendors, suppliers, and other partners, your reputation for punctuality and reliability may improve, particularly among larger and more well-known companies.
Possible Risks
With all these benefits, factoring may sound too good to be true. Like any financing method, there are some possible risks to consider.
When you factor your invoices, you are losing some control over accounts receivable. The factor is responsible for collection, and giving up control over part of your business can be daunting. The factor also requires financial information during the application process, which could raise security concerns.
This is why it is so important that you search for a factoring company you can trust. Not all factors are the same, and you want to find a company that is trustworthy, reliable, knowledgable, and easy to work with.
Final Note
So if you're in the construction industry and you've been searching for a simple way to increase cash flow, construction factoring may be for you. Working with a factoring company can help you free up capital to keep your business running smoothly.
Contact Factor Funding if you have any questions about the factoring process or how it can work for your business.
