The success and growth of your company is dependent on you having the funds you need for things such as payroll, supplies, overhead expenses, and taxes. Construction factoring can help you get the funds you need immediately without having to wait for client payments.
Since your money is so important we wanted to make sure you had all the answers you needed to your questions regarding construction factoring. So given that, below is a list of commonly asked questions about construction factoring.
Q: What is construction factoring?
A: Also referred to as accounts receivables financing, construction factoring is selling the right to payment in receivables or invoices to a factoring company at a small discounted rate from face value. This allows you to not have to wait the normal 30-60+ days for payment.
Q: How can construction factoring help my business?
A: By providing an immediate source of cash flow for your company. You can use this cash to provide working capital, meet payroll, pay taxes, replenish inventory, increase advertising, purchase equipment, improve your credit rating, and so much more.
Q: How can a factoring company give me cash for my unpaid invoices?
A: You provide the factoring company with the original invoice and purchase order or contract, and they will fund you 80% or more of the amount that would have been paid to you by your customer. Then the factoring company collects the total amount due on these invoices from your customers and refunds the balance to you less a fee.
Q: How much does construction factoring cost me?
A: Different factoring companies calculate the costs differently but usually the fee is based on monthly dollar volume, the number of invoices, the length of time it takes invoices to pay, and the credit of your customers. I would recommend you find a factoring company whose fee is all-inclusive so you don’t feel like you are being nickel and dimed.
Q: How long does it take to process my application?
A: Processing time can vary by factoring company but generally you can expect a factoring company to be able to process your application, complete the required paperwork, and fund your first invoices within a few business days of receiving your complete application and required accompanying documents.
Q: What is the difference between “recourse” and “non-recourse” factored invoices?
A: Invoices factored on a “recourse” basis means that the client is ultimately responsible for payment whether or not the customer pays. Factoring invoices on a “non-recourse” basis means that the factoring company assumes the credit risk of the customer (usually at higher rates), thereby protecting the client from possible credit loss.
Q: Do I have to be established in business for a minimum number of years to be approved?
A: Factoring companies have different criteria but typically you don’t need to be in business for a minimum number of years. Factoring can help growing businesses and also new, start-up companies with accounts receivables.
Q: Are my receivables held as collateral?
A: Yes. The factoring company purchases your invoices through the factoring process and, therefore, they become the first position lien holder on all of your invoices while you are a client.
Q: How long do I have to commit to factoring my invoices?
A: Different factoring companies offer different contract terms. We recommend you find a factoring company that does not require any long-term contracts. So you can determine what is best for your company and which invoices you will factor and for how long you factor them.
Q: I have had a past bankruptcy. Is accounts receivable funding still an option?
A: Yes. Many factoring companies will still consider your application even if you have had credit problems or a past bankruptcy. They are usually more concerned with the credit rating of your client’s credit score.
Q: Are accounts receivable factoring fees tax deductible?
A: Most CPA’s agree that accounts receivable funding fees are a business expense and should be treated as such.
Learn more about how factoring affects your taxes.
Q: What happens if my customer doesn’t pay the invoice?
A: If your contract is a recourse agreement then your company will ultimately absorb the credit risk either by replacing the invoice with another collectible invoice or having the amount due for the invoice deducted from the next advance or your reserve. If your contract is a non-recourse agreement then you won’t be responsible for the payment but there is typically a larger fee and sometimes a required account deposit for these terms.
If there are additional questions you have about how construction factoring can support your business, please contact us, we would be happy to answer them.
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