How much do you really know about payables financing? Back in the good ole days, if you were a construction contractor, you could do work on a handshake and payment was due upon receipt of the invoice. You can expect payment within a few days. As time progressed, owners and some general contractors (GC) decided they needed to pay you net 30, or 30 days upon receiving your invoice.
They argued that it took time for their accounts payables group to receive, process, and get approval up the bureaucratic line for payment. This made some sense, so you swallowed it. Just a few short years ago, they stretched pay terms to 60 days. Today, most general contractors offer pay-when-paid (PWP) and pay-if-paid (PIP) terms.
How Payables Financing Affects Subcontractors
So let’s break this down in terms of pain for you, the subcontractor. You get the luxury of buying the supplies and materials and delivering them to the owner’s project. And, in most cases, you pay for these out of your pocket.
You get to bill monthly for a portion of these materials, along with your labor, as you incorporate them into the structure. Under the PWP and PIP terms, you are not paid by the general contractor until after they get paid by the owner. And it’s even worse if the owner doesn’t pay the GC. In this case, you get to file a lien and hire an attorney to help get your money!
Can You Afford to Wait Six Months for Payment?
On large, complex projects with many moving parts, it can take months for an invoice to get approved and incorporated into the GC’s invoice to the owner, approved by the owner’s architect, and then finally approved by the owner.
And don’t forget, it now takes time for the owner to get the invoice processed and approved up the bureaucratic line. So, from the time you purchase materials for the owner’s building and drop them on site, to the time you’re paid, it’s often 120 to 180 days. Yes, half a year.
The owner gets the benefit of watching their project come out of the ground and as much as six months can go by before they pay you for the progress. Simply put, you carry the cost while they watch you build their structure. This is called payables financing. They use money that would otherwise be paid to you to help finance their project.
Before You Accept Payables Financing
To be fair, not all owners or GCs operate this way. Some are very fair and will pay for the materials up front to take the burden off the little guy, and will pay them in a reasonable time frame. When you find this type of customer, do a good job, no, do a great job and keep them happy. There are fewer and fewer of these customers every year.
It would be easy to say just avoid this trap. Don’t work for these folks. But it’s not that simple. In today’s world, big companies are gobbling up firms every year and getting bigger and bigger. With this comes supply chain purchasing power and everyone wants to work for them. They dangle the carrot of multi-million-dollar projects in exchange for you accepting their terms.
You Don’t Have to Settle for Payables Financing
My advice is simple. Decide what you want your business to grow up to be and work the plan. Be true to yourself, know your scalability and the game you can afford to play, and manage your finances accordingly. Taking too large a bite out of the apple can, and will, choke you.
At CapitalPlus, we understand the nature of payables financing and the strain it puts on you and your business partners. Before diving into this game, give us a call. We will help you predict your cash flow needs on a project and help you understand the impact on your business. Furthermore, we can assist you with your cash flow needs using one of several financing products.Back to blog