How to Finance a Building Products Distributor

Most building product distribution companies that work with large contractors or large commercial clients know that to get a sale they need to offer customers up to 60 days to pay invoices. Offering payment terms is a common business practice in Canada.

However, offering payment terms to clients presents two problems. First, you take the credit risk that the client will not pay and the invoice will turn into bad debt. Second, your cash flow is negatively impacted because you have to wait for payment.

Dealing with credit risk

Obviously, your building product distribution company should offer credit terms only to commercial construction clients who have good credit and pay invoices when due. There are a number of ways to determine the credit risk of a client.

Asking for trade references is a common, but not very reliable, way to determine creditworthiness. A better strategy is to get commercial credit reports on your clients. If you haven’t already done so, your company should develop a process to determine client creditworthiness. Having a process helps minimize the chances of not getting paid.

Dealing with cash flow risk

Offering payment terms poses a risk to your cash flow, especially if your company does not have proper cash reserves. Many companies offer 60-day terms because they have to, even though they cannot afford it. This practice often leaves them with little cash in the bank and exposed to serious problems.

You may run out of money and be forced to delay payments to suppliers and employees. The best way to deal with this problem is to build a cash reserve and use business financing to fund operations.

How to finance operations

A simple way to finance your operations is to use a line of credit. You can cover expenses by withdrawing funds from the line and then replenishing the line when your clients pay in 60 days. The problem is that qualifying for a line of credit is difficult in Canada. Most lending institutions are risk- averse and provide funding only to companies with solid records.

A better alternative may be to use construction factoring. Factoring provides immediate liquidity for your slow-paying invoices from creditworthy clients. This solution can provide you with the funds to pay your suppliers and employees. It also minimizes the cash flow problems often associated with offering payment terms to commercial clients, general contractors, and builders.

How does factoring work?

The transaction is relatively simple and is structured as the purchase of your invoices in two instalments: the advance and the rebate. The first instalment covers about 80% of your invoice and is advanced as soon as you deliver the building products. The remaining 20%, less the factoring fee, is rebated as soon as your client pays on their usual terms. You can learn more by reading “What is factoring?


One important advantage of invoice factoring is that the line immediately improves your cash flow. You can use it to offer term to clients without worrying about negative cash flow implications. Actually, if you have lost sales because you were unable to offer terms, this tool is a game-changer.

Also, qualifying for invoice factoring financing is relatively easy. The most important requirement is to have invoices that are payable by reliable and creditworthy clients. And most lines can be funded quickly. This benefit makes factoring an ideal choice for small businesses that have working capital problems and need immediate funding.

Pay-when-paid considerations

Many construction contracts have a pay-when-paid clause, which many times can be interpreted as a pay-if-paid clause. Invoices with this clause attached do not qualify for financing because of the risk of non-payment or short payment. For these invoices to qualify for financing, the purchaser’s contract must be amended to rescind this clause.

Get more information

We are a leading provider of factoring and offer high advances at low rates. For information, get an online quote, or call (877) 300 3258.