The construction industry trend is now uphill once again. For many small construction firms, this growth will require further financial preparation and a smooth cash flow. It isn’t uncommon for construction firms to operate in a position of negative cash flow for a while, especially with the costs of paying subcontractors. A reliable source of capital, or hefty cash reserve, is necessary for construction firms to bridge this gap. That’s where invoice factoring for construction comes into play.
Reliability and flexibility in accessing capital is key. Traditional financing through a bank or commercial lender is ruled out for most smaller construction firms, and it isn’t a viable option. It requires a lengthy application and approval process, incapable of addressing the immediate need for capital. Banks also lack the flexibility that construction firms need for handling short-term variations in cash flow.
Therefore an increasing number of construction companies are turning to invoice factoring, an option that has been around for hundreds of years as an effective method for financing business operations.
Here’s how invoice factoring works:
First, a factoring company (or the “factor”) purchases the construction firm’s invoice at a minimal discount, then pays up to 80% of it to the business within 2-3 days. In order to protect against billing discrepancies, the factor allocates part of the invoice value to a reserve, as well as taking on the responsibility of collecting receivables within the regular terms of the invoice. When the funds are collected, the factor pays the business the reserve minus fees, which are typically 1-3% per month. Future invoices can be sold to the factor as often as needed.
No credit qualification is necessary as the creditworthiness of the business’ customers is relied upon. Best of all, new debt is avoided and no payments are required by you with a factoring facility. Factoring can help construction companies avoid negative cash flow, providing a flexible and reliable source of capital.