The construction industry is fraught with issues. There’s the going concern of cash flow, the constant issue of delayed customer payments, and the added burden of the length of the contracts themselves. Can an argument be made that cash flow management is far more difficult for construction companies? Absolutely! That’s why a large majority of construction firms have come to rely upon receivables factoring as a means to manage their daily operations and finance their long-term growth aspirations. Today’s construction companies need not concerns themselves with the longevity of their projects. Big or small, there’s a factoring solution ready to meet your company’s critical needs. Most importantly, it will allow your enterprise to finance multiple projects, all the while minimizing the impact of your cost of capital. So as a construction firm looking to alleviate the constant concern of an uneven cash position, how can factoring help your enterprise finance with its current projects and long-term growth?
When thinking of factoring, think of the liquidity within your firm’s current unpaid invoices and contracts. Think of the value within these contracts and the difficulty in collecting due to the numerous changes and modifications to existing jobs. Regardless of whether your company is in residential, commercial or industrial construction, factoring allows your company to tap into existing assets, without having to wait for final payment. In essence, you no longer have to finance your customer’s operations and can instead, finance your own! How does this work?
The financing company will advance your enterprise a percentage of your current receivables. In return, your company transfers the right and responsibility of collecting on those invoices over to the financing company. Initial payouts range from 80% to 90% and are based on your enterprise’s risk tolerance. If you have a given customer with solid financials, and an excellent payment history, then you may opt for the higher payout and lower processing fee. However, doing this means your company assumes responsibility for the customer’s final payment. If you are unsure of the customer, then opting for the lower payout and higher processing fee means you assume less risk. Each of these options are readily available and empower your company to decide how best to manage your firm’s receivables. In both cases, when the customer pays the financing company, your firm is reimbursed the difference from the initial payout, and charged a processing fee. Because of the popularity of factoring, those fees are very competitive.
Factoring is a process that has been around for thousands of years. Most construction companies are well aware of the practice of offsetting their cost of capital with a financing company who will advance them funds based on their current open contracts. It will allow your firm to finance its daily operating expenses, while financing the purchase of the raw materials and parts so vital to maintaining your project’s timeline.