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 not a loan so you won't need to apply for financing nor will you need to submit to a credit check.
Rather, when you use a factoring company, you sell them 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 several advantages 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. Construction factoring also lets you receive your money very quickly, sometimes in as little as a few business days, rather than waiting up to two months or more to be paid.
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.