Many contractors who need working capital to cover things such as payroll and materials struggle to find financing when their contracts consist of progress billing and progress payments. One option to get the capital you need, if you deal with progress billing and progress payments, is construction factoring. With construction invoice factoring you get access to the funds you need to make payroll, buy supplies, pay vendors and more.
Invoice factoring, also known as accounts receivable factoring, turns your unpaid invoices into immediate working capital, regardless of your credit history or company size, eliminating the need to wait 30, 60 or 90+ days to get paid. One benefit that invoice factoring has over getting a traditional bank loan is factoring companies look at the creditworthiness of your customers, instead of that of your business. Given that, if your business has a creditworthy commercial customer base with unpaid invoices, invoice factoring is an option for you to consider. Additionally, construction factoring companies will provide financing for progress billing and progress payment contracts.
If you are used to the lengthy process of trying to get a bank loan the quick and easy process for working with a construction factoring company might surprise you. With a bank it can take months to get approved for a line of credit. However, with a factoring company account set up takes a matter of days with funds being approved generally in less than 24 hours. Once your account is set up the process is simple to continue to receive funds. First, you simply do the job and invoice your customer as usual. You will also need to send a copy of the invoice to the factoring company. The factoring company will then send you cash, this is usually up to 80% of the value of the invoice, often in a matter of hours. The factoring company will then wait to collect on the invoice from your customer and send you the balance, less a fee, once they have collected the payment.
There are many added benefits that construction factoring companies offer and depending on the size of your construction company you many or may not need to take advantage of them. The benefits include:
- Understating the lien laws can often be challenging for contractors. Often times factoring companies who specialize in construction understand the lien process and can help you with a basic understanding of lien laws in your state as well as get the lien releases for you. Additionally, they often subscribe to a service that gives updates on the latest changes to the lien laws by state to help you stay current with the laws in your area.
- Small and growing contractors don’t always have the staff to operate as an accounts receivable department like larger companies might have. The factoring company can step in and provide some of these services. From paying your subs and suppliers to helping you manage the financial aspects of the project factoring companies can be a great asset.
- There are also additional back office services a factoring company brings to the table that will help you manage and track the project more efficiently such as helping you ensure you have signed and executed contracts, your contracts are bonded and you have the key contacts for the job, including information on the GM, the owner and who is in accounting to help ensure you are going to get paid.