When cash flow issues hit your construction business, especially during the wait for accounts receivable, the need for quick financing becomes urgent. Many construction companies, especially small to medium-sized ones, turn to Merchant Cash Advances (MCAs) as a fast solution. But before you sign that MCA agreement, it’s worth exploring if there’s a better alternative: Invoice Factoring.
MCAs… The Only Option for Quick Funds?
As a construction company, cash flow crunches are common, especially when you’re waiting on payments for completed projects. This can make covering essential costs like payroll or materials for future jobs a challenge. MCAs offer quick funding with minimal paperwork, which is why they’re often the go-to option for contractors in a pinch.
However, the high fees and aggressive repayment terms that come with MCAs can quickly turn what seemed like a short-term solution into a long-term financial burden. The repayments, pulled directly from your bank account, can really strain your daily operations especially if your payments are not consistent.
Factoring: A Smarter, Safer Alternative?
Invoice factoring offers similar fast funding. Rather than being a loan like an MCA, factoring is simply a purchase of your outstanding invoices. This option can have distinct advantages:
- Safer Repayment Terms: Your clients repay the factoring company’s advance through their invoices, reducing strain on your cash flow.
- Quick Funding: MCAs and factoring’s funding can happen quickly. You can expect payment in as little as 24 hours after your account is established.
- Lower Fees: Factoring typically has lower costs compared to the fees of MCAs.
- Minimal Paperwork: Like MCAs, factoring is quick and requires minimal documentation especially compared to traditional funding like bank loans.
- Better Cash Flow Management: There are no direct withdrawals from your bank account, allowing you have consistent balances, i.e., control over your finances.
Factoring provides a more sustainable option for construction businesses, making it easier to manage daily expenses and growth.
Real-World Success: Helping a Contractor Escape the MCA Trap
In July for this year, an electrical contractor from Florida found themselves overwhelmed after taking on too many projects simultaneously. With $400,000 tied up in MCA loans, their cash flow was getting unmanageable. Turning to CapitalPlus’ $1.5 million factoring facility, the contractor was able to pay off the MCAs early, freeing up $300,000 for payroll, and catching up on important aging accounts payable.
This simple example is a typical one of our clients. It shows how factoring can be a lifeline, offering not just relief from immediate cash flow issues but also a path to more sustainable financial management.
Is Factoring the Right Move for Your Business?
If you’re currently shopping for MCAs, it’s worth considering another option that has many of the same benefits to helping your business. Invoice factoring offers a less risky, more cost-effective solution that could save you from the long-term headaches (or worse) associated with MCAs.
First step? Let’s discuss if factoring is a better alternative for your business. Our team at CapitalPlus specializes in construction financing and can help you determine the best solution for your unique situation. What do you have to lose?
