Raise Capital Now With Construction Factoring
The construction industry has been negatively affected by recent housing market woes. Banks are wary of getting caught in another crash and are reluctant to extend credit to contractors and subcontractors. Factoring may be the answer to stabilizing your company’s cash flow.
A Quick Explanation
This financial tool has been used for centuries and involves partnering with a finance company, called a factor. After your business invoices a client, the factor finances the invoice by paying your company in two installments. The first installment is a large percentage of the amount invoiced. When your client pays the amount due, the factor pays the second installment – the remaining percentage of the invoice total after deducting a percentage called the discount fee.
The percentage of the initial advance varies and can be affected by the client’s payment record as well as the work record of your company. If there’s a discrepancy between the invoice amount and the amount paid, that difference is reflected in what your company receives in the second installment.
Traditional loans are typically granted for a specific purpose. The proceeds you receive through factoring have no restrictions placed on them, so you can pay suppliers, make payroll or purchase equipment.
Small businesses in particular can benefit by going this non-traditional route because they generally have difficulty being approved for conventional loans. In addition, the loan process may be lengthy so working with a factor can result in receiving the funds your company needs in a much more timely fashion.
One disadvantage is the costs you incur. Your business will not receive the full value of the invoice for each client whose invoice is factored. The definition of costs can be extended to include any time and effort that must be devoted to requesting advances from the factoring company. There may also be tax disadvantages to the process, so you should consult a tax professional when making your decision.
A sometimes-overlooked disadvantage can be that your customers are typically made aware of the arrangement. The factor not only advises your customers that their debt has been transferred; it can also contact your customers to ensure that they are satisfied with your performance and verify invoice amounts. You should take the possibility of negative perceptions into account when evaluating whether this financial tool is right for your company.
Because of recent struggles in the construction and housing industries, access to credit for contractors and subcontractors has been much more difficult to come by. Taking advantage of non-traditional financing alternatives such as factoring can ease cash flow worries and keep your business on track.