One of the challenges of providing lumber to general contractors and construction companies is that you often need to provide them with payment terms. Most construction projects have payment schedules based on completion and other criteria, and GCs often have to abide by them. As a result, you get paid after they get paid.
Unfortunately, customers can take up to 60 days to pay for the lumber they purchased from you. Unless your suppliers provide you with equally generous terms, you may face financial problems because you need to pay suppliers before your clients pay you. This delay can create problems for smaller lumber yards and distributors without established credit or large reserves.
The cost of missed opportunities
These financial problems affect your ability to operate the business and grow your company. You may delay or miss supplier payments, or you may have to pass on large orders simply because you don’t have the money to build up the lumber inventory. Ultimately, you could miss sales opportunities and the chance to grow your lumber yard. And if you don’t manage your cash flow carefully, you could encounter serious financial difficulties that threaten your ability to service your construction clients.
Use construction receivables factoring
Obviously, you would not have a problem if your clients paid invoices sooner. The problem is that many clients can’t or won’t pay sooner simply because it’s to their advantage to pay slowly. However, you can get many of the benefits you’d get from quick-paying invoices by using construction receivables factoring.
This financing solution solves the problem of slow-paying clients. It uses a factoring company to finance your invoices from creditworthy general contractors and builders. The factoring company provides you with an advance which you can use to operate your company and cover expenses. This tool allows you to manage your cash flow more effectively by providing the funds you need to pay key suppliers.
Creditworthy clients is key
Factoring can only be used for invoices payable by clients with good commercial credit. Your client must have a track record of paying their invoices, albeit slowly. This requirement can be a problem in the construction industry because a number of general contractors don’t have good commercial credit. Consequently, construction receivables factoring is best used on invoices payable by large, reputable contractors or builders.
How does the transaction work?
The factoring transaction works by partnering with a construction factoring company to handle the financing by factoring your invoice in two installments. The first installment, the advance, covers about 80% of your receivable. The factor wires the money to your account after the invoice has been verified and the lumber has been delivered.
The remaining 20% is rebated to your company after your construction client pays the invoice in full. The financing fees are often deducted from the rebate and can range from 2% to 4% per month based on the credit quality of your clients and size of your account.
The most important advantage of construction receivables factoring is that it allows you to offer net 30 to net 60 day payment terms — a significant service enhancement if your company was unable to offer credit to clients in the past. Factoring allows you to grow your customer base and increase your revenues.
Another advantage is that the line does not have a fixed maximum. Rather, most factors provide a flexible line that can increase as your volume of sales to qualified construction clients increases. This flexibility makes factoring an ideal solution for companies that are growing quickly.
Is factoring right for your company?
Usually, factoring will be right for your business if your main financial problem is that you offer credit terms to your construction clients but can’t afford to wait for payment. If this scenario applies to your business, financing your construction invoices can be an ideal solution to improve your cash flow and enable you to grow beyond financial limitations.
Get more information
We are a leading construction factoring company and can provide you with competitive terms. For information, get an online quote or call (877) 300 3258.