When cash flow becomes a problem, you will need options to help significantly get cash coming in. It doesn’t matter just how much you invoice, and it’s having fewer payments that are the issue! Bank loans, lines of credit, and bank cards are some options you can consider. But they can take quite a long time to process, require a credit check, and often require collateral. Construction invoice factoring may be the answer you’re looking for. We’ll look at what factoring is, why you may put it to use, and weigh the advantages and disadvantages – the professionals & cons of construction factoring.
Factoring turns construction invoices into cash.
Construction invoice factoring involves a company purchasing your unpaid invoices in exchange for immediate cash. You sign an agreement to sell your invoices to the factoring company, and they provide you with 75-90% of the amount of money upfront being an advance. Your customer then pays the factoring construction company, who sends you the remaining balance, less the factoring company’s fees. Fees for this service, called the factoring rate, are approximately 1-3% of the total amount of invoices sold.
Why use invoice factoring?
You need money quicker than your customers typically pay you.
In construction, you might have to wait 45-60 days or even more for payment (the average amount of time in the building is 83 days!). It may be difficult to wait that long, especially if you want to buy materials, meet payroll, and pay your suppliers. If you find that you always have to wait to pay your bills, factoring is the right choice for you. You can receive most of one’s profit just a few days from the factoring company, and you’ll get the total amount as soon as your customer pays (less the factoring company’s fees).
You have no credit (or you have credit issues).
Factoring companies aren’t thinking about your credit history or how fast you spend bills. Your web visitors are the ones who are going to be paying them. The business will check the credit of your web visitors and will make use of this information to determine which of one’s invoices to purchase. The sole credit that matters with factoring is your web visitors ‘.
You don’t have collateral to get a loan.
Banks usually require collateral to be able to secure a loan (house, car, equipment). Whenever you put something up as collateral, the lender has the proper to bring it away from you if you default on the loan. Invoice factoring is not just a loan, so there’s no collateral. The factoring company buys the rights to the payment of one’s invoices, so no collateral is needed.
You don’t want to use other financing options, such as bank loans or credit cards.
There are many negatives about obtaining a loan or applying for bank cards:
- Your credit is going to be checked once you apply for a bank loan or a credit card.
- You’re developing a long-term financial relationship with the lender or charge card company. You are going to be paying them for a long time!
- It usually takes weeks or months to process a loan or get yourself a card.
There is no credit check once you factor invoices, Also, depending on the contract, you’ll have an on-going relationship or a short-term arrangement, depending on your needs. Whenever you don’t need to utilize factoring anymore, you can terminate the agreement and come back to business as usual. And, you can receive most of your cash within a few days of signing a contract.
The Pros: Benefits of construction factoring
Immediate cash
Using factoring can get cash faster and easier than with other kinds of financing. Whenever you factor, you can get 75-90% of the invoices you sell paid for in days, not weeks or months.
Lower cost
Factoring is usually cheaper than credit cards. The convenience fee for factoring is 1-3% per month. Credit cards often charge much higher rates, with the average APR close to 20%.
No credit check
The factoring company shouldn’t need to test your credit. If you have issues in your past, or no credit history at all, you can still factor invoices. To assess payment risk, factoring companies consider the value of the invoice and the creditworthiness of one’s customer.
Reduced collections
Invoice factoring will take the worry of chasing down customer payments off your plate. You don’t have to worry about exactly when customers pay their invoices. You receive most of one’s cash upfront the moment you invoice, and the burden of collection passes to the factoring company.
No collateral required
Factoring doesn’t require you to provide collateral. The factoring company buys the collection rights to your invoices, so you never need to put up any collateral. In effect, the invoice itself serves as its collateral.
Customer research
The factoring company will research the credit of your web visitors, letting you know if you will find any issues. The burden of checking your customer’s credit history passes to the factoring company. They’ll let you know if anyone possesses an issue. Of course, you may want to take additional steps to check the GC’s credit before a task begins.
Improved relationships
Generally, factoring can improve the relationship between you and your customers. When you do not have to keep to bug them about payment, you both can focus on the project. Factoring – especially contract factoring – will take the payment stress away from your plate.
Long-term option
It would be best if you used factoring to enhance cash flow on an on-going basis. Factoring companies offer long-term contracts that could last for months, so you do not have to help keep reapplying every time you want to factor. A long-term factoring contract may help remove your accounts receivables worries, and you’ll get your cash promptly each month.
