Construction Invoice Factoring:
A Smart Contractor's Best Tool

Construction invoice factoring is a tremendously powerful business financing tool for contractors and subcontractors competing in today's volatile construction industry.

Commercial construction financing has always been difficult, and while finding business financing for any small or medium sized company in the construction industry has always been a challenge, in the last few years, the vexing and protracted crisis plaguing both residential and commercial real estate has made it even harder.

Even in a healthy business climate, commercial construction financing is very risky and complex.

So many things can go wrong in any given project, and with multiple players involved -- from the project owner to the general contractor to the subcontractors – there is always the potential for problems. Given the steady deterioration in the real estate climate since 2007, it is no surprise that very few companies are financing businesses in the construction industry today, and, in fact, many lenders have pulled out of construction financing altogether.

Still reeling from the effects of the deflating building bubble and with reliable small business financing so difficult to obtain, many general contractors and subcontractors are discovering the many benefits of construction invoice factoring.

Smart Business Financing Without Debt

Construction invoice factoring has been used in the building industry for many years. For centuries, accounts receivable factoring has allowed businesses to obtain cash for their current accounts receivables. Because contractors and subcontractors often must wait as long as ninety days to get paid for their outstanding invoices, construction invoice factoring can solve serious cash flow issues created by delays in payment by advancing funds against unpaid receivables. The transaction is settled once the GC or commercial client pays.

Most company owners and managers naturally think of a bank loan or business line of credit to cover cash flow gaps. In this environment, however, few companies in the building industry possess the collateral and impeccable financial statements to meet the rigid qualification criteria used by banks. Factoring companies care little about the financial qualifications of their clients; instead, they want to see receivables from quality companies.

This is a key difference between a business line of credit and construction invoice factoring, as one of the primary benefits business factoring in general. Because factoring companies look to your receivables as collateral for funding, your business financing is tied directly to your sales and will grow automatically with your company. Provided you are working for good commercial clients or general contractors, your company should never again find itself short of cash to meet payroll or pay bills.

Construction Invoice Factoring Benefits

For just about any contractor or subcontractor, construction invoice factoring offers a number of benefits. The most important one by far is that it will provide your business with a stable, predictable cash flow without going into debt.

Other benefits include:

• Automatically grows with your business. Your construction factoring lines increase with your projects
• No waiting to get paid for your work - you get an advance almost immediately after invoicing, allowing you to start immediately on the next project phase or a new job
• Factoring is easy to obtain and can be set up very quickly

How Does It Work?

Factoring account receivables is a simple process and can easily be integrated to your business. Construction invoice factoring works as follows:

• You complete a job or progress segment and send an invoice to your client and forward a copy to the invoice factoring company
• The invoice is verified with the general contractor or your commercial client
• You receive the first invoice advance for up to 75% of the invoice, typically within 24 to 48 hours
• Once your client pays, the remaining 25% reserve is rebated to you, less a small fee

Who Can Qualify?

As you have already read, the major requirement to qualify for construction invoice factoring is to do business with reputable and financially stable general contractors or commercial clients. If that is the case, then you should experience no problem in locating factoring companies willing to offer your company a factoring facility. Generally, a factoring line can be set up in as little as 5 days with only a brief phone call or by completing a simple application form.

There are a few things you can and should do before contacting factoring companies. These three steps should help you better position your company for funding:

• Have up to date financial statements. This includes a balance sheet, income statement/Profit & Loss, A/R aging report and AP aging reports
• Take care of any unpaid taxes as best you can (many factoring companies can work around outstanding tax delinquencies, particularly minor ones)
• Clean up your receivables and try to resolve any accounts more than 60 days past due.

The better prepared you are, the faster and smoother the process will be.

As you have seen, construction invoice factoring can give contractors and subcontractors an excellent financial foundation for a strong, stable construction-related business. Unlike a bank loan or business line of credit, a business factoring facility will grow automatically with the company, with no re-applying, no expiration date, and no payments to make.

In today’s tough climate, most companies operating in the building industry should give serious consideration to this easily obtained, benefit-rich small business financing solution.