As a contractor or subcontractor, your available cash flow can vary greatly when you depend on payments from clients.
As a contractor or subcontractor, your available cash flow can vary greatly when you depend on payments from clients. To eliminate the uncertainty (and unpredictability) of customers paying on time, consider factoring. Factoring allows you to begin the next phase of projects and start new projects without waiting on payments from clients. Learn more about factoring here.
What is factoring?
Factoring is a financial model designed specifically for construction companies to help them get short-term financing. This is not a construction loan, which requires a lengthy application and approval process.
Instead, this model gives you advance payment on the value of your current invoices. Instead of waiting months to be paid by clients, you can receive funds almost instantly from a factoring company for the amount you are owed by clients.
How can factoring help my company?
When you rely on customer payments, your business is held hostage to your finances. For example, if a customer does not pay on time, you are forced to halt projects or even miss a payroll deadline, leaving your employees unpaid and unhappy.
By using factoring, you are no longer subject to the whims of customers. Factoring stabilizes your cash flow, which allows you to move forward with projects and pay employees on time without the crushing stress that comes with worrying when a payment will come through.
How do I know if factoring is right for me?
If you have had to turn business away, missed payroll or cannot pay other business expenses because of a lack of capital, factoring is an option worth considering, especially if you are frequently worrying about clients who miss payment deadlines and how those payments impact your construction schedule.
When selecting a factoring service, keep a few things in mind:
- What is its invoice processing system?
- How long has it been in business?
- How do they pursue repayment?
It is also important to find a company that you can easily contact and receive quality customer service, since you will be working closely with them.
Factoring is an important tool that helps contractors stabilize their cash flow. The process is not as lengthy or rigid as a construction loan, and lending is based on invoices you are owed for current projects. If you find yourself needing a solution for bridging gaps between payments, consider factoring for your business.
Editor's Note: Looking for a factoring solution for your business? If you're looking for information to help you choose the one that's right for you, use the questionnaire below to have our sister site, BuyerZone, provide you with information from a variety of vendors for free:
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