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Christiana, PA 17509, USA
CONTACT NO.: 610-228-4137
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Construction Factoring Facts

Being a contractor in today’s environment is extremely difficult. Banks are not lending so contractors are reliant on their customers to pay their invoices in a timely manner, which means 30-60-90 days. All the while you’re expected to make payroll, pay vendors and try to grow your business. This is impossible without access to working capital and if a bank won’t lend you the money you have to either:

• Turn down jobs

• Find jobs where GC’s/owners pay promptly, which aren’t abundant because most contracts are “paid-when-paid”

• Find an alternative solution to improve cash flow

Fortunately there is a solution and it’s called factoring. Factoring provides relief to contractors by giving you access to immediate working capital without any additional burden on the general contractor or owner to pay quicker than they normally would. Factoring allows contractors to consistently meet their payroll, pay vendors timely and bid on more jobs that they otherwise couldn’t.

Here is how construction factoring works:

1) The contractor completes the work as usual.

2) Then the contractor sends the factoring company a copy of the invoice for work they’ve completed.

3) 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.

4) The contractor’s customer sends the factoring company the payment when the invoice is due.

5) The factoring company remits the balance of the escrow less a fee to the contractor.

It’s fast, it’s flexible, and it allows contractors and/or subcontractors the ability to grow, maintain steady cash flow and bid on more jobs.

Benefits of working with a factoring company

Where banks will consider whether your company is financially sound when deciding to approve a loan, factoring companies don’t look at the size of your business or your creditworthiness. In fact, factoring companies look 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 or 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 some of its challenges. Once the contractor 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 to receive early payment discounts that they otherwise would not receive. Understanding the lien laws can often be challenging for contractors. Often times factoring companies who specialize in construction understand the lien process and can help you with a basic understanding of lien laws in your state as well as get the lien releases for you. 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 don’t always have the staff to operate as an accounts receivable department like larger companies. The factoring company can step in and provide some of these services as well. From paying your subs and suppliers to helping you manage the financial aspects of the project, factoring companies can be 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, ensuring your contracts are bonded and that you have the key contacts for the job, including information on the GM, the owner and who is in accounting to help ensure you are going to get paid.

Additional working capital options

In addition to factoring there are a few other options available to contractors to obtain working capital outside of a traditional bank loan, including utilizing an asset based lender or equipment financing. An asset based lender will provide a line of credit based on your companies assets. An equipment finance company can offer different lease and loan options on both new and used equipment. They can help you lower your monthly payments on the acquisition of new equipment or with refinancing your existing equipment. An equipment finance company can also help you turn some of the equity you have in your existing equipment into working capital.

So you may be wondering which option is best for you. Here are a few key differences:

• A factoring company can provide you with the funds more quickly, often in less than 24 hours when it could take 2-3 months to get an asset based loan.

• Asset based lenders and banks will set a credit limit and if you need to increase that to accept a new opportunity it could take months to get approved. With a factoring company all you need is additional credit worthy commercial clients with unpaid invoices to get additional working capital.

• When you work with an equipment financing company or an asset based lender you are acquiring debt. When working with a factoring company, as long as your customer pays their invoice you are not acquiring debt.

So even though factoring may be more expensive than some other options, it can be a perfect working capital solution for you as long as your profit from additional opportunities is more than the factoring cost. There truly can be no downside. Factoring may not be the right fit for everyone, but with factoring volume at over $2.1 billion in 2016* many companies see it as their key to cash flow security and growth.

*According to the Commercial Finance Association’s Annual Asset-Based Lending and Factoring Survey Highlights, 2016.

To gain access to immediate “Debt Free” working capital call us today at (610)228-4137 or email sam@alliedbusinessfunding.com