Two of the greatest financial challenges for construction subcontractors are meeting payroll and paying suppliers. Paying these two critical expenses is often very difficult for two reasons.
First, most subcontractors run very lean operations and don’t have large financial reserves. And second, most general contractors (GCs) and commercial clients pay their progress payment invoices in 30 to 60 days.
When you combine these two issues, it is easy to see how subcontractors working on many projects could over-extend themselves. And if they don’t manage things carefully, they may miss critical supplier payments (or payroll) and find themselves in a severe cash flow crunch.
When this happens, you risk going out of business.
Banks are not always the solution
If you need money, you could ask a bank for a loan or line of credit. If you are successful, this strategy would certainly alleviate the issue and provide the funds you need to run your business.
Unfortunately, most financial institutions are wary of lending to companies in the construction trade. Many will demand two to three years’ worth of profitable financing statements, substantial collateral, and a spotless record before providing you with financing. The reality is that few subcontractors can meet this criteria.
The solution: you can finance your invoices for progress payments
In many cases, the cash flow problem is not that your company does not have the money. Rather, the problem is that your money is tied to slow-paying accounts receivable. If all your commercial clients paid quickly, you probably would not have financial problems.
While getting clients to pay quickly may be difficult, you can get similar benefits by using construction factoring, a special type of invoice financing that offers an easy way to finance and grow your construction business.
The program finances your invoices from creditworthy GCs and commercial clients – providing immediate funds you can use to pay suppliers, employees, or to take on new projects.
How does construction factoring work?
Most transactions are structured with payments in two installments, as follows:
- You send an invoice to the GC or client for a progress segment or completed job
- The invoice is verified with your client
- We advance your company up to 80% (this amount varies) of the submitted invoice
- Your client pays after 30 to 60 days
- We rebate the remaining 20% reserve, less the service fee
Note that retainage payments cannot be factored.
Does your company qualify?
The most important requirement to qualify for this type of financing is to do business with reputable general contractors or commercial clients. They must have good commercial credit since the transaction depends mostly on their ability to pay – on time and in full.
You must have a well-run business with good invoicing practices, and your invoices must be free of liens. Generally, a factoring financing line can be set up in as little as 5 days, depending on circumstances.
Can we help you?
We are a leading construction factoring company and can provide you with a competitive proposal. For more information, get an online quote or call (877) 300 3258 to speak with an expert.