The market has many factoring providers; however, only a few companies actually specialize in construction factoring. This shortage can make the process of selecting the right factoring company very difficult. Some companies don’t factor construction opportunities at all. Others will tell you that they work with construction opportunities but then reject your application at the last minute because they were not “comfortable with your particular trade.”
This article provides some pointers to help you choose a construction factoring company. It complements our previous article, How to Choose the Right Factor for Your Business, which you should also read.
Consider the following points when selecting a construction factoring company:
Question #1: Are they industry specialists?
Perhaps the most important question you can ask is if they specialize in the construction industry. It’s OK – and common – if they also specialize in other industries, as long as they have a construction specialty and have been in business at least five years. Given the complexities of financing construction receivables, avoid companies that are not specialists and handle only a few opportunities per year.
Question #2: Are they comfortable with progress payments?
Most construction contracts are paid using progress payments. Because progress payments aren’t always precise and can be subject to charge-backs and disputes, they make some factoring companies uncomfortable. However, companies that specialize in construction are comfortable with these types of payments and know how to manage them. If a factor is not comfortable with progress payments, consider other candidates.
Question #3: Can they deal with “pay-when-paid” clauses?
Many construction contracts have a pay-when-paid clause that states that you get paid only when – and if – the general contractor gets paid. Typically, these contracts are impossible to finance because you never know if the general contractor is going to pay you. However, companies that specialize in this industry don’t always walk away from these contracts. They are familiar with techniques that can be used to get around this problem. Keep in mind that these techniques don’t always work because they require the cooperation of your general contractor. One way to determine if the finance company you are interviewing is an expert is to ask how they deal with pay-when-paid clauses.
Question #4: Are they familiar with industry differences?
Many companies that don’t specialize in this industry mistakenly assume that all construction finance opportunities work the same. For example, construction factoring companies know that financing a cell tower maintenance company is completely different from financing a directional boring company – even though both are considered construction. As a result, always ask prospective factors if they are familiar with your industry and its billing practices.
Question 5: How do they handle retainage payments?
Many construction contracts stipulate that 10% (on average) of the payments are retained until the end of the contract. This practice, called retainage, is often used to settle disputes/problems. Construction invoices subject to these contracts clauses often have the retainage subtracted before they are factored.
One way to tell if you are dealing with an industry specialist is to ask how they handle retainage. If they are unsure, it’s almost certain that you are not working with an industry specialist.
One last suggestion
We certainly understand that you want to move quickly when cash is tight. However, if you are looking for factoring, take your time evaluating factors and be thorough. You need to be certain that this long-term relationship supports your business objectives. Taking a few extra days to interview factoring companies usually helps ensure that you make the right choice for your construction business.
May we earn your business?
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.