One of the most common challenges
a business in the construction
field faces is maintaining cash flow. Yet most businesses are subject
to progress payments, meaning they generally do not begin to receive
payments until 30, 60 or even 90 days into the project. The answer
to the inevitable cash crunch is factoring, which is quickly becoming
the alternative financing method of choice throughout the construction
What is Factoring?
Factoring means selling your accounts receivable – whether
they be invoices, progress billings, requisitions. or AIA’s
-- to a finance company (known as a factor) for a discount.
The factor actually buys
one or more of the business’s invoices,
advancing cash to the business– typically, 70%. Once the invoice
or invoices are paid, the
factor will rebate the balance
of the invoice after deducting its fee.
Who Can Benefit from Factoring?
Contractors, subcontractors, suppliers, and every other small
to medium-size construction-related business can benefit from factoring.
How Can the "Quick Cash" Available through Factoring
Construction-related businesses can use the funds available
to them through factoring
to pay their workers, make tax, workers’ comp,
union dues, and insurance payments…and buy the materials
necessary to complete their jobs. It can help a business that is
facing a cash flow survive – and it can help a business grow
by providing the funds needed
to go after new jobs and
new markets. The recent rebuilding following the devastation of
Hurricane Katrina is the perfect example.
What Are the Advantages of Factoring?
- Speed. A business that finds itself in a cash
crunch may receive its funding in as little as 24 hours.
- No Monthly Payments. Since the business does
not actually borrow any money, it makes no monthly payments.
- Continuous Cash Flow. Factoring provides a
business with cash whenever it is needed.
- Relies on the Financial Strength of Customers.
on the financial strength of a business’s customers, not on the business’s
- Stimulating Growth Opportunities. Factoring
offers businesses the chance to grow by providing them with access
to funds they can use to bid on other jobs, get new customers,
go into new markets, and increase their scope.
- Accessible to Unbankable Businesses. Any business
with accounts receivable can qualify for funding through factoring.
WHEN YOU BORROW
- It limits your flexibility
- A lender will secure assets equal to a minimum of three times
the amount of the loan
- You can not secure additional funds without renegotiating the
- You must meet monthly payment obligations
- There is a loan liability on your balance sheet
WHEN YOU FACTOR
- You don’t borrow money
- You make no monthly payments
- You receive funds in 24 hours or less
- You control your cash flow by determining how much you need
- You increase the availability of immediate cash which can enable
you to bid on more new jobs and earn additional supplier discounts.