If you are in the construction industry, you are aware that every project involves several steps:
• Obtaining materials/equipment
• Hiring skilled labor
For larger, expensive projects, your client may be willing to sign an agreement. Although, chances are they are not expecting to pay for the job upfront. This means that you end up having to come up with large amounts of cash to cover costs until the job is completed. In some cases, this could take months and even years. This means you could end up running low on funds. This is why many construction companies depend on things like construction factoring.
What is Construction Factoring?
Construction factoring is not a loan. It is a cash advance based on your outstanding receivables. It allows you to expedite cash flow so that you can either move to the next phase of a project or start a new one. Whilst you’re waiting on your client to pay instead of having to wait.
This is a suitable alternative to any construction company or independent contractor. It’s also a great option for those who need funds fast or who don’t qualify for a traditional loan. If you are in a situation where you need funds to cover expenses and have a lot of high-volume receivables, this may be the best option for you.
How Does Construction Factoring Work?
When you use construction factoring, you are basically selling your invoices to a third-party company, known as a factoring company. They give you an advance to cover the invoice minus their fees. Once you do this, the factoring company takes over collections- the invoice is no longer yours.
Here’s a closer look at how it works.
Decide on a factoring company
Look over your invoices. If you have any that are 30+ days old, you should start looking for a factoring company that fits your needs. Find out if they have experience working with construction companies, what their rates are, and whether they charge any additional fees.
Once you choose a company, go through their application process. They may choose to do a credit check on your clients to find out how likely they are to pay the invoice. Upon application approval, the factoring company will send you an agreement that will outline the fees, payment plans, and the amount that is being advanced to you.
Once the agreement is signed
Once you decide you are happy with the terms and you sign the agreement, you will be given the advance rate. This is typically 80 to 90% of the value of the invoice. Since you are granting the factoring company responsible for the invoices, they will contact your clients to let them know that payment needs to be made to them instead of you.
After the client pays
Once the invoice has been paid by the client, the factoring company will send you the remaining 10 to 20% of the invoice, minus their fees. This is known as the “reverse amount”.
Do you own a construction company and you believe that construction factoring may be an option to your financial predicament? Contact DAL Commercial Capital. We will be more than happy to help!