Construction invoice factoring is a great way to get immediate cash for your unpaid invoices. However, there are a few obstacles that contractors and construction companies encounter when trying to factor their invoices. We explore the most common so you can be proactive.
Your customers are not credit-worthy.
One of the benefits of construction factoring is that the factoring company typically looks more at the creditworthiness of your customers than at you and your business. This allows them to get the funds they need that they otherwise could not have. However, for those construction companies who do not have creditworthy customers, unfortunately, factoring won’t be an option.
How to deal with this:
As part of the onboarding process, factoring companies will provide credit checks on your customers. This will let you know upfront if there are obvious problems. If there are, the factoring company may look for other ways to help you. One example would be to try spot-factoring only the invoices of your other clients whose credit is acceptable.
Your customer does not sign the Notice of Assignment.
You might submit all the necessary paperwork but if the debtor (your customers) will not sign the Notice of Assignment, the factoring company cannot move forward. This can ultimately put the brakes on you getting funding. By signing this document, the debtor is acknowledging and agreeing that the factoring company has purchased your receivables. It also tells them that their payment will be sent to the factoring company.
How to deal with this:
Often your client will be confused when an “unknown” third party contacts them, especially if money is involved. When you make the decision to use factoring, communicating early with them is a big step in avoiding worries… both contractually and verbally. The factoring company can even help you by setting up a phone meeting so they can put a “face with the name.”
The Invoice Verification has problems.
When the factoring company sends the invoice verification to the debtor and they return it stating that the work has not been completed, or any other requirements for payment have not been completed, the factoring company cannot move forward. Your customer may also reveal that there are subs/suppliers who need to be paid. Since they are paid at funding directly by the factoring company, this amount has to be at MOST equal to the advance. If subs/suppliers need to be paid and the amount totals up to more than the advance amount, the factoring company cannot move forward, because you are not factoring enough to cover the subs/suppliers.
How to deal with this:
Again, communication is key. If your client tells us the job is not completed to their satisfaction or there are additional payment requirements, we will let you know of the issues allowing you both to come to an agreement with each other.
Unfortunately, the situation can get complicated at this point. If things are not resolved quickly, specific solutions will need to be explored on a case-by-case basis.
Payment is not sent to the factoring company.
In order for the factoring company to send the remainder of the funds to you, or to continue to fund your other invoices, they must receive payment in full from your customers. When payment is mistakenly sent to someone other than the factoring company, the release of the remainder of the funds can be delayed.
How to deal with this:
Although all documentation clearly spells out that payments must be made by your customer to the factoring company’s lockbox, sending the check to the wrong party does happen. When it does, the client is required to forward the payment within 48 hours of the mistake. It is common to resubmit the Notice of Assignment to their debtor for everyone’s clarity. If the mistake continues to happen, a decision needs to be made to not do future work with this particular debtor, for everyone’s security.
Stay proactive to avoid roadblocks.
Although factoring can be much quicker than say getting a bank line of credit, there can be challenges that can slow, or even stop the process. Knowing them upfront can help reduce the chances they become a problem. If you have concerns, contact us. We can give you ideas on how to not only avoid them but also help if problems arise.
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