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How Factoring can Help your Construction Business


How Factoring can Help your Construction Business

 

Cash flow issues in the construction industry is pretty normal, you might have a lot of your cash tied up in materials and suppliers as well as needing to pay other contractors and subcontractors. Material prices are always changing, which means your budget is never certain. What happens when you have an opportunity to grow, would you be able to tie up those funds or will it prevent you from working?

 

What is construction factoring

Construction factoring will allow a subcontractor to borrow against their future receivables. When factoring, a construction company will assign its invoice to the factoring company and then the factoring company will provide the construction company cash straight away.

 

How do you factor construction invoices?

Construction invoice factoring requires that a party providing work agrees with a factoring company to factor their invoices. A factoring company will agree to pay out 70%-80% of the value of the invoice to the subcontractor before the payment would have been received. When the bill comes the factoring company will collect it. When the factoring company is paid for the subcontractor’s work, the factoring company will then pay the subcontractors the remaining 20%-30%.

 

Why do construction businesses factor their invoices?

Seeing as construction payments are quite slow, with factoring you will be able to obtain payment for most of the invoice 30, 60 to 90 days earlier than normal. If the subcontractors’ company is paid in full then the subcontractor will only lose a small percentage of the invoice when it’s all over. Here are some reasons on why factoring might work for your business...

Payroll:  Unlike other industries, payment come straight away after the work is complete in the construction industry, with even some payments coming months after. This makes it difficult to keep cash reserves to smooth out payments for payroll and overhead, these things can’t be paid at the same irregular schedule as your customer payments. By using invoice factoring, a large portion of the invoice can be paid up front for payroll and overhead.

Bid on larger jobs: When a contractor wants to expand their business, they need bidding on a larger number of jobs but bidding on more jobs means working with companies beyond the normal customer base.

Cash to buy equipment: When you need new equipment, whether it’s too old, broke or to grow the business, you need cash. With factoring you will be able to have the cash faster to then buy this new equipment to help your business.

 

Added: 11 Apr 2019 12:08


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