Factoring Services in the Construction Industry
If you’re in the construction industry, you face unique challenges that are difficult to overcome without deep pockets. You have to front the cost for your materials and labor, complete the job, generate an invoice and then wait 30 or 60 days for payment. It’s not unusual to see 90 days pass from the time you write that first check until you get paid by the general contractor.
This situation leaves you with few options. You could seek out some type of short-term business loan or run up credit cards. You could also choose to take on fewer projects, limiting the growth and profitability of your company. Neither of these are great choices.
Fortunately, there’s a third option that allows you to continue to take on new projects without taking on additional debt. This third option is called factoring. Factoring services provide funding to keep your business running. Factoring unlocks the cash that is tied up in your accounts receivable.
What is Factoring?
Factoring is the process where you assign your accounts receivable to a third party. Typically you invoice the general contractor and they pay you directly. With factoring, you assign that invoice to a company that provides factoring services. The factoring company provides you with an advance on that invoice. The GC pays the factoring company who in turn remits the remaining amount of the invoice to you less the factoring fee.
A Real World Example of Factoring Services in the Construction Industry
Big Bob Framing, Inc. has a contract with Triple A General Contractor Co. to do the framing on a new commercial construction project. Big Bob expects to have the exterior framing done in month 1 and the interior framing will be completed in month 2.
Big Bob has to pay for his materials up front and needs to meet payroll every other week. Month 1 starts, Bob writes a check for his materials. Two weeks go by. Bob writes a check for payroll. Two more weeks go by and a check is cut for the next payroll. With all of this money out of pocket, the exterior framing has been completed and Bob submits the first application for payment.
Triple A General Contractor Co. takes a few days to review the application for payment, the invoice is approved and it is sent to corporate to be paid. Good – money is on the way to cover all of the out of pocket expenses from last month; however, month 2 is starting and Bob has to cut a check for the materials needed for the interior framing, followed by two more rounds of payroll. It’s now 60 days out from when the project stated and Bob’s invoice is due. If Triple A General Contractor is good, Bob should have payment in a few days, if not it could be several weeks before Bob sees a dime.
How Factoring Changes the Timeline
Now, let’s see how that scenario looks when Big Bob Framing, Inc. is using factoring services to fund the project. Bob is still out of pocket in month one; however, as soon as the general contractor approves the application for payment – Bob submits the invoice to the factoring company.
The factoring company gives Bob an 80% advance on the invoice which Bob can use to fund the next phase of the project. Bob could also start work on a new project. Bob has cut at least 30 days of the time he has to wait for the GC to pay. Bob also doesn’t have to worry if the GC pays a few weeks late. The factoring company will forward the remainder of the invoice once it’s paid, but it’s a small percentage of the overall job and won’t make or break Bob’s business.
If you aren’t using factoring services it puts you in a tight spot. If you don’t have the cash in the bank to cover expenses for the next 60 days, you can’t take the job. Factoring cuts that period in half, if not more. Factoring is perfect for the construction industry. It gives you the cash you need to keep your business running regardless of how long the GC takes to pay.
