Construction companies with cash flow problems find that factoring invoices is a way to continue to grow their business, even with late-paying clients. There are many advantages to invoice factoring for construction companies, but there can be a few disadvantages as well. Read on to learn about the various pros and cons of factoring to discover if this may be the right solution for your company.
Advantages of Invoice Factoring for Construction Companies
You Get Access to Working Capital – Fast
This is the #1 reason construction companies choose to partner with a factoring company. Access to working capital allows you to continue to fund new and current projects, maintain your workforce, manage your overhead, and continue to scale. Without cash flow you can’t continue to operate. Invoice factoring allows you to grow without relying solely on your clients’ timely payments.
You Can Keep Your Extended Payment Terms
Invoice factoring helps construction companies continue to extend 30 to 60-day payment terms to clients. Your factoring company will ensure that you are paid quickly for those invoices, so you don’t have to miss out on deals with companies that need extended payment terms.
As long as you have delivered on the project agreement with your client, you will be able to collect your funds from the invoice company and they will handle receiving full payment from the client.
You Can Qualify Easily
It can be a difficult and lengthy process to qualify for many business financing solutions, but invoice factoring provides a relatively simple qualifying process. Most companies are able to contract with a factoring company easily, if their invoices reflect already delivered work with creditable clients.
The only other thing that may stop you from being able to partner with a factoring company is a lien or legal issues with your company. If you are free of those, you should be able to receive invoice factoring services without issue.
Only Your Invoices are Collateral
Loans and credit lines often require substantial collateral. Invoice factoring, however, only uses your invoices as collateral. This means you can keep your real estate, equipment, and other assets separate.
Small Companies Can Use Invoice Factoring
A regular business loan can be hard to get if you’re a small business. However, factoring helps even small construction companies maintain cash flow, even with late-paying clients. This is a powerful solution for smaller companies looking for a way to grow their business.
Disadvantages of Invoice Factoring for Construction Companies
It Can be Expensive
While factoring allows you to get your hands on cash fast, the APRs are typically higher than other forms of financing. However, every factoring company operates differently, so it is important to get in touch with the companies and ask about their APRs in order to find the best solution for your business.
You’ll Need to Properly Manage Relationships
When you sign a contract with a factoring company, you agree that they will pursue payment from your clients. This means that they will receive a Notice of Assignment, which will alert them to your relationship with the factoring company.
When you use factoring, your clients will have contact with the factoring company. If this is something that bothers you, it may not be the right solution for you. However, most construction company clients understand this common practice and are untroubled by it.
Factoring Companies Don’t Handle Bad Debt
Sometimes clients simply do not pay their invoices. While factoring companies will pursue invoice payment from your clients, they are not a collection company. You will be responsible for any bad debt that occurs through unpaid client invoices. If this is a risk you are unwilling to take, invoice factoring may not be the best choice for you.
Get Paid Fast with CapitalPlus Invoice Factoring
Invoice factoring can help your construction business continue to thrive. Contact CapitalPlus to learn more about how you can get paid within 72 hours. We look forward to serving you.