Pros and Cons of Invoice Factoring for Your Construction Company

Construction companies with cash flow challenges often use factoring of their invoices as a viable way to continue funding their business, even with late-paying clients. There are many advantages to invoice factoring for construction companies. But there are a few disadvantages to be aware of. Read on to learn about the various pros and cons of factoring to decide if this may be the right solution for your business.

Pros 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 like lines of credit from banks, 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 might 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 or New 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 ways to grow their business.

Cons of Invoice Factoring for Construction Companies

Factoring Can Be More Expensive Than Bank Loans

While factoring allows you to get your hands on cash fast, the annual percentage rates (APRs) are typically higher than other forms of traditional financing (however, factoring rates can be much less than another available funding option: Merchant Credit Advance loans). Of course, every factoring company operates differently with different rates based on the agreement’s length of time, the amount retained, etc., so it is important to inquire in advance. After all, nobody, including your factoring company, wants surprises. Transparency is the key to benefiting both parties.

You’ll Need to Properly Manage Client Relationships

When you sign a contract with a factoring company, you agree that they will be getting payment from your clients, not you. This means that the client will receive a Notice of Assignment, which will alert them to your new relationship with the factoring company.

Notice of Assignment: 
A Notice of Assignment (NOA) is a straightforward letter that legally informs your client that a third party, such as a bank, factoring company, or financing company, will now be responsible for managing and collecting their accounts receivable.

When you use factoring, your clients will now have contact with the factoring company. If this is something that bothers you, factoring may not be the right solution for you. However, most construction company clients understand this common practice and are rarely troubled by it especially if they know it will be happening in advance.

Factoring Companies Don’t Handle Bad Debt

Sometimes clients simply do not pay their invoices. Factoring companies will pursue invoice payments from your clients, however, but they are not collection agencies. After exhausting other means with the client, in the end, you will be responsible for any bad debt that occurs through unpaid client invoices. Keep in mind, the factoring company should do much due diligence before making contracts official… for both your and their peace of mind and safety.

Is Invoice Factoring Right for Your Company?

With so many pros and cons, invoice factoring is right for some but not everyone. If you are unsure, contact us to discuss your specific situation. We look forward to helping you decide.