What is a Factoring Company? How Does it Help Construction?

In business, companies, especially in the construction industry, often face financial challenges. From handling large projects with extended payment terms to managing seasonal fluctuations, the need for reliable cash flow is paramount. Traditional financing options like bank loans or lines of credit may not always be accessible or quick enough to meet these demands. This is where alternative financing from factoring companies comes into play, offering solutions that can provide immediate financial relief and ongoing support.

What is a Factoring Company?

A factoring company provides financial services by purchasing your outstanding invoices. This transaction provides the business with immediate funds, which can be crucial for maintaining operations without the wait typically associated with client payments. Unlike traditional lenders that offer loans, factoring companies buy the receivables, thus providing cash without increasing a company’s debt load.

With over 353 factoring companies currently operating in the US, factoring has become a significant component of business financing, offering a welcomed alternative to traditional credit solutions. This prevalence underscores the trust and reliability businesses place in factoring services, especially in sectors like construction where cash flow is critical.

How Do Factoring Companies Work?

The Factoring Process:

The process a factoring company uses to assess and send funds to a business is relatively simple:

1. Pre-Approval/Application: After a general “fact finding” call and you both agree you are a good fit for factoring, you will be asked to send a few basic documents and sign forms to become a client.
   
2. Invoice Submission: After your company completes a job, it issues an invoice to the client and the factoring company.
   
3. Verification and Advance: The factoring company verifies the invoice and “advances” a percentage of its value (typically 70-90%) to your business within 24-48 hours.
   
4. Client Payment: The factoring company waits for your client’s payment according to their normal payment terms.
   
5. Balance Payment: Once the invoice is paid in full, the factoring company will send you the remaining balance minus their fees.

What Industries Do Factoring Companies Work With?

Just about any business can benefit from the a factoring company’s services, but the ones most obvious need are ones that have longer periods between completing work and receiving payment. Some of the most common industries are:

• Manufacturing: When facing delays in receiving payments for large orders, the manufacturing industry can utilize factoring’s immediate cash infusion to purchase raw materials and maintain nonstop production.
  
• Transportation and Trucking: As part of their trade, trucking companies incur significant upfront costs for fuel, maintenance, and driver payroll. Factoring helps ensure smooth operations​ allowing them to bridge cash flow gaps.
  
• Staffing Agencies: Slow paying clients can really hit staffing agencies hard. Paying their employees on time can be difficult. Factoring ensures they have the cash flow necessary to meet their payroll obligations​.

• Medical Services: Healthcare providers, including medical practices and home healthcare services, often face slow payments from insurance companies. Factoring helps them manage cash flow and continue providing care while still paying their team.

• Wholesale & Distribution: Wholesale and distribution companies often extend credit to their clients leading to the potential for cash flow gaps. Factoring helps to cover these gaps while also being able to purchase inventory and pay operating expenses​.

• Food & Beverage: Businesses connected with the food and beverage industry often deal with perishable goods where time is of the essence. Quick cash is required to replenish their inventory. Factoring ensures they have the funds necessary to keep their supply chains moving​.

Why Factoring Companies Work Exceptionally Well in Construction

For many of the same reasons as the above industries, factoring can also be particularly supportive for those in the construction trades, especially compared to traditional financing methods like bank loans, especially for construction businesses:

• Quick Cash Flow: Enables companies to maintain continuity and liquidity without the wait for client payments. This benefit is crucial because it is typical in the construction industry for accounts receivable payments to take 30-90 days. When construction companies have multiple projects overlapping or limited numbers of contracts, these cash flow gaps can significantly impact their ability to operate efficiently, pay bills, or take on new projects.
  
• Easier Qualification: Since factoring companies focus on the creditworthiness of your clients rather than your company, it is generally easier to qualify, even with less-than-perfect credit.
  
• No Collateral Required: Unlike secured loans, factoring doesn’t require physical assets as collateral, which is beneficial for new or growing companies without significant capital assets.

Specific, special cases in construction that need unique attention:

• Project-Based Billing: Factoring can be especially beneficial in dealing with the project-based billing cycles of construction, where payments can be delayed until project milestones are reached.
  
• Handling Retainage: Construction contracts often include retainage – holding back a portion of the payment until project completion. Factoring can work with these arrangements by providing funds during project milestones, ensuring constant cash flow.

Industry-Specific Funding Challenges

Construction businesses often face hurdles when applying for traditional financing. Common push-back of banks and other lenders can be due to the cyclical nature of the industry, high project costs, and payment disputes. Factoring addresses these challenges effectively:

• Credit Issues: Construction companies dealing with credit issues or have minimal history can still receive funding. The approval process looks primarily on the credit of the customers and not construction company.
  
• Flexible Funding: Factoring provides a flexible line of funding that adjusts with your invoicing, ideal for the fluctuating workload of construction projects.

Comparing Factoring to Common Financial Solutions

Factoring stands out when compared to other popular options for construction businesses like bank lines of credit or Merchant Cash Advances (MCAs):

• Bank Lines of Credit: Often require extensive credit checks and collateral which might not be feasible for new or expanding companies.
  
• Merchant Cash Advances: While quick, MCAs can carry high costs and risks, especially if the business’s cash flow is unstable.

Case Studies and Real-World Applications

Over the past 25+ years we have have worked with thousands of construction businesses and have seen just about every situation that caused financial shortfalls. This client is an example that we see over and over in our line of work. This specific one is a mid-sized subcontractor specializing in masonry. His client’s slow payment threatened their operations for obvious reasons. By turning to factoring, they received 80% of their invoice value within a few days of being approved as a CapitalPlus client. The funds allowed them to meet payroll and not worry about taking on new projects. This example and others like it, showcases how effective factoring can be in addressing industry-specific financial challenges.

Transparency and Fee Structures in Factoring

Transparency in fee structures is crucial. Reputable factoring companies ensure prospective clients understand all fees, including service charges, processing fees, and any potential additional costs. This transparency ensures that businesses can make informed decisions and maintain trust in their financial partnerships.

>> LEARN MORE: All Factoring Fees & Contract Terms You Need to Know

Additionally, it is important to note that because factoring involves the purchase of invoices rather than the provision of a loan, factoring companies are generally not subject to the stringent state and/or governmental regulations and compliance issues that burden traditional lending institutions. This regulatory flexibility can often result in quicker processing times and fewer bureaucratic hurdles for businesses seeking immediate cash flow solutions.

What’s Next?

Factoring companies offer practical financing solutions, helping businesses navigate financial complexities. With faster access to funds, less stringent qualifications, and no collateral requirements, factoring can be a pivotal resource for maintaining and growing your construction business.

Now that we have answered the question “what is a factoring company?” you now hopefully have the understanding how make the best financial choice for your business. Next steps? You need to know how to pick the right factoring company for your construction company. And if you have questions, reach out. We will be happy to help you assess your situation for fit.

---

---

Back to blog