Flourishing as a contractor or commercial remodeler in today's tight money environment can be extremely difficult. Banks are reluctant to lend and so contractors and remodelers become even more reliant on their customers to pay their invoices in a timely manner.
Meanwhile you’re expected to pay your staff, vendors, and subs while trying to grow your business. If you’re without access to working capital and unable to borrow from a bank you’ve got to either:
1) Turn down jobs
2) Find jobs where owners pay promptly, which aren’t abundant because most contracts are “paid-when-paid”
3) Find an alternative solution to improve cash flow
While your burden as a contractor or remodeler may be great, subcontractors suffer even more as they are furthest from the cash flow. On top of the slow payment terms, most general contractors or owners hold a 10% retainage from each pay application, making matters worse.
Fortunately, there is a solution called “factoring”. Factoring provides relief to contractors and remodelers by providing access to immediate working capital without any additional burden to pay quicker than you normally would. Factoring allows contractors to consistently meet their payroll, pay subs and vendors timely and bid on more jobs they otherwise couldn't afford to.
Here is how factoring works:
1) A contractor sends the factoring company an invoice for work they've completed.
2) The factoring company wires up to 80% of its value into the contractor’s bank account that day, then holds the remaining 20% in escrow.
3) The contractor’s customer sends the factoring company the payment when the invoice is due.
4) The factoring company remits the balance of the escrow less a fee to the contractor.
Factoring is fast, flexible, and it allows small and growing contractors to maintain steady cash flow so they can bid on more jobs, keep their crews busy, and stay in business.
Benefits of working with a factoring company
Before approving a loan, banks will determine whether they consider your company to be financially sound before approving a loan, this takes time and involves uncertainty. Factoring companies don’t look at the size of your business or your creditworthiness. Factoring companies look instead, at the creditworthiness of your customers. So just about any contractor that has a creditworthy commercial customer base with invoices for products delivered, or services rendered to another business or government agency can benefit from factoring.
Construction-focused factoring companies
Most factoring companies choose one or more industries to specialize in, such as transportation, staffing and construction. When you choose to work with one who specializes in construction, you get the benefits of working with a partner who really knows your industry and can help you navigate many of its challenges.
Once the contractor or remodeler submits an invoice to their factoring company, the factor will pay the vendors right away. The quick payment to the vendors often allows the contractor or remodeler to receive early payment discounts that they otherwise would not receive. Also, subs are likely to benefit from prompt payment and likely to factor this into their bids.
Understanding lien laws can sometimes be challenging for contractors. Factoring companies who specialize in construction have a thorough understand the lien process. They can help you with a basic understanding of lien laws in your state, as well as help you get the lien releases you need. Additionally, they often subscribe to a service that gives updates on the latest changes to the lien laws by state to help you stay current with the laws for your area.
Small and growing contractors and remodelers don’t always have the staff to operate as an accounts receivable department like larger companies might have. The factoring company can step in and provide some of these services. From paying subs and suppliers to helping manage the financial aspects of the project, factoring companies can provide a great asset. There are also additional back-office services a factoring company brings to the table - such as helping you ensure you have signed and executed contracts, making sure that your contracts are bonded and that you have the key contacts for the job - including information on the general manager, the owner and who ever is in accounting to help ensure you are going to get paid on time.
Factoring may not be the right fit for everyone, but with factoring volume at over $88 billion in 2011* many companies find it as their key to cash flow security and growth.
About the Author
Brad Beck is Director of Business Development at CapitalPlus Equity a factoring company assisting construction companies with their cash flow needs. Find out more at www.capitalplus.com.
*According to the Commercial Finance Association’s Annual Asset-Based Lending and Factoring Survey Highlights, 2011.
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