Construction Companies sometimes find themselves under-estimating construction projects and over-budgeting projects.
Such as buying expensive materials weeks before sending an invoice or permitting delays on job site construction.
In any construction industry or small contracting business, these issues have most likely happened regardless of what type of construction one might specialize in, whether it is flooring, demolition, electrical, roofing, HVAC, or some other form of residential or industrial construction.
Every type of construction project involves estimating, budgeting, purchasing materials and equipment, plus hiring very skilled dependable crew.
Especially for larger, more expensive projects and even though your clients often sign an agreement, they usually don’t expect to pay for an entire job up front.
Of course this means small contracting businesses or even large construction companies must front large amounts of cash for the construction cost until the work is completed, which could take months, or even several years.
Does your construction company sometimes run extremely low on funds, or without enough needed operating capital for months, depending on how many concurrent projects and invoices you may have.
Of course, no business can stay afloat without having cash reserves to rely on.
As a result of this situation many construction companies as well as small contracting businesses rely on construction invoice factoring to obtain the cash flow that is necessary for them to perform their day-to-day operations.
Invoice factoring is a cash advance for your outstanding receivables. It is never a loan.
Once a company or small contracting business has been approved for construction invoice factoring, the construction company or small contracting business gets access to funds, typically within just a few business days, for their outstanding invoices.
With invoice factoring, construction companies and small contracting businesses are able to expedite their cash flow, so they can begin the next phase in their projects or even start a new project.
Invoice factoring ensures that construction companies and small contracting businesses will be paid sooner instead of latter and this is always better than having to wait for customers to pay your invoices when a construction project has already been completed.
Invoice factoring is suitable for any type of construction company or independent contractor.
Whether they specialize in residential or industrial- landscaping, roofing, paving, site clean-up, painting, or utilities.
Any contracting company that issues invoices with net terms between 15 to 90 days is eligible for invoice factoring.
Construction invoice factoring is also available for companies who may not qualify for other types of loans, for construction companies or small contracting businesses in need of receiving funds more quickly than is possible with a bank loan.
If your company is faced with immediate expenses and has a lot of high volume incoming invoices, then construction invoice factoring could help.
Construction companies need cash flow in the first place just like any other business.
Construction businesses and small contracting businesses have operation costs of their own that are usually non-negotiable, such as:
- Payroll, for hanging on to your employees.
- Equipment, tools and supplies, to keep work going in the office and in the field.
- Office space, furniture.
- Business insurance, to protect you in the case of accidents or disputes, Maintenance and renovations.
- Sales and Marketing for growing your business and keeping a steady stream of projects in your pipeline.
- Legal fees, for assistance with business documents and contracts.
- Utilities & rent, to keep your office comfortable and your lights on.
- Fees for maintaining locally mandated certifications.
- For example, in their state all contractors must be licensed by their State License Board in order to bid on large projects. Getting certified and keeping your certifications up to date each year can cost hundreds and sometimes even thousands of dollars.
Having some extra cash on hand can help a business stay ahead of their competition by funding faster growth for the business.
A business owner might use extra funds for things like:
- Hiring new employees to complete jobs faster, or take on more jobs
- Purchasing new equipment
- Purchasing more vehicles
- Expanding to a new location to serve more new clientele
- Marketing expenses, or for attracting new business
Construction businesses also need to have extra capital to be prepared for these situations:
- Threat of getting sued – In the construction field, there is always the possibility of workers or even pedestrians getting hurt on or near a construction site. Even if you obey all applicable laws and take all the possible safety precautions, you could still become the target of a lawsuit.
- Paying overtime hours – When projects grow bigger than their original scope, construction businesses and small contracting businesses will find themselves needing some extra operating cash to support overtime pay for workers.
- No job is guaranteed – The construction industry is very competitive and an industry where clients will potentially jump to another contractor if they are provided a better deal.
- Unrealistic deadlines – Some clients will ask for highly optimistic deadlines.
As a business owner in the construction industry, you have to always be planning for the possibility of your projects dragging on longer than you expected and costing more than you estimated.
Having some extra funds reduces the pain of these situations by reducing your overall business cash flow volatility.
- Economic downturn – When the economy is not doing so well, real estate development and investment in construction will most likely follow thus translating to less business for you. No construction company is immune to such greater economic factors.
- Help with clients who won’t pay – Even the most respectful of your clients may turn out to be slow in paying you. They might run out of money once a project is underway, or just drag their feet when paying their bills. Some clients may want to make changes to the work and refuse to pay, which could result in a long costly legal battle.
When you decide to work with a factoring company experienced in collections, they can help collect what your clients owe you.
- Compete for more work – By having additional cash flow in your business through factoring, you can afford to be more competitive, offering more services and paying for up front material costs for new jobs that other companies cannot afford to do.
- Handle unexpected losses – Equipment breaks down over time and perhaps your workers organize a strike. Perhaps a storm or natural disaster puts your project on a shut down.
- Regardless of what may cause an unexpected loss or delay. It’s important to have extra cash flow which factoring provides so you can face unexpected loss with real confidence.
Invoice factoring is essentially a sale of invoices to a third party company, called a factoring company.
The factoring company (also known as a “factor”) then gives you an advance to cover the invoice, minus their fees after your clients have paid back the invoice.
When you sell your invoice to a factoring company, they take over the collections on that invoice and they will collect directly from your customer.
If you need money and have any outstanding invoices between 30 to 120 days old you should consider factoring, you will be given the advance rate, which is usually 80% – 90% of the invoice value.
Essentially you will be transferring the responsibility of the your invoices to the factor, the factoring company will contact your clients and let them know of your invoice factoring agreement, as well as any new instructions for how they can pay back their invoices directly to the factoring company.
After your client has paid off their invoice, the factor will send you any remaining balances, minus their service fee from the remittance.
This is known as the “reverse amount”. The fee factoring companies (factor) charge for factoring your invoices is known as the rebate.
When considering construction invoice factoring, you may have also come across a similar financing plan called “construction receivables financing.”
Construction receivables financing is similar to invoice factoring in that both provide advances based on qualified unpaid invoices and both involve a third party company to coordinate and take responsibility for the financing.
There are, however, a few differences that may be significant for your business:
- Complete control of collection services – Construction receivables financing does not change the way you collect payment from your clients. With Construction receivables (invoice financing), your clients continue to pay you normally, rather than paying a factor. *In this case, your clients do not need to be aware that you are experiencing low cash flow, something many small business owners prefer.
Full invoice value – Companies using invoice financing can receive 100% of the invoice value beforehand, rather than a portion, as with invoice factoring.
- Faster approval time – The application for invoice financing is often shorter than for factoring. It may take only a few hours or days.
- All electronic – The process for withdrawing and paying funds can all be done online with invoice financing, which means moving funds around is fast and convenient.
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