Countless financial issues occur regularly in the construction industry that can threaten anyone’s business.
Late or unpaid invoices can stop a construction company in its tracks and leave them in serious cash flow straits.
If you need working capital, construction invoice factoring may seem like the help you need to stay on your financial feet but there is also a better solution so you can avoid all of the disadvantages that come with invoice factoring.
In this article, learn everything you need to know about invoice factoring, including:
We understand the financial challenges that come with the construction industry.
That’s why we’re here.
Flexbase provides resources that help you get through the challenging times, so you can make your construction business what you want it to be.
One of our cash flow forecasting solutions is to automate and streamline invoicing with AIA forms so that you get paid faster.
But when you don’t get paid or find yourself in financial difficulty, we’ve got you covered with the following Flexbase services:
With Flexbase, you can stay cash flow positive despite the financial obstacles that may be in your way.
Construction company factoring is a type of cash advance on payments you are waiting to receive. Construction factoring is not a loan but may require approval or a credit check.
Construction invoice factoring provides you with the cash you need so that your work doesn’t have to halt. It frees you up to move on to the next phase of the project or to start a new job.
To factor an invoice, a construction company or subcontractor will “sell” or assign an outstanding invoice to a factoring company. In return, the factoring company will advance funds to the construction company quickly, usually within 1 to 3 days.
When invoice factoring for the construction industry, consider the following timeline:
Let’s say you’ve completed your portion of the work on a project, and you send an invoice to your client for $10,000. After 60 days, you have not received payment, so you decide to factor the invoice to have the working capital you need.
Here’s an example of how the process would work:
Any company or subcontractor with cash flow issues may be interested in construction invoice factoring.
Companies that may not qualify for other types of loans or companies that need funds fast may also find that construction invoice factoring is the best solution.
Two types of construction invoice factoring may be offered by a construction factoring company:
Spot Factoring - This type of factoring is used when a company needs cash right away and needs to factor in only one invoice. Spot factoring may be the way to go if a business doesn’t have substantial cash flow problems but just needs cash because of an isolated invoice glitch. Spot factoring can be more expensive than contract factoring.
Contract Factoring - This type of factoring is similar to spot factoring, but with a larger number of invoices. The factoring company provides cash in exchange for each progress payment. With the larger number of invoices, contract factoring rates tend to be lower.
Construction companies incur a myriad of expenses:
When the funds aren’t available to meet these regular expenses, the construction company may decide to turn to construction invoice factoring to fulfill their financial responsibilities.
Cash flow can be unpredictable in construction because payment isn’t always received immediately after work is done. Sometimes it won’t be received until months later.
That can make it tough to take care of recurring expenses like payroll, rent, utilities, etc.
Factoring invoices may provide you with cash upfront to take care of those expenses until you are paid for your services.
Unlike other financing options like bank loans or credit cards, you don’t need a good credit score to qualify for construction invoice factoring.
Construction invoice factoring companies aren’t interested in your credit score because technically, you are not the one paying them. However, they do care about your customers’ credit scores, since that is whom they will ultimately collect payment from.
Before deciding to purchase your invoices, a construction invoice factoring company will check the credit scores of your clients to determine whether they want to buy the invoices.
Typically, banks require collateral in order for a construction company to secure a loan.
Since the construction invoice factoring company is buying your unpaid invoices, there is no need for collateral.
Growing their construction business is likely a goal for most construction company owners. But with unsteady cash flow, it can be difficult to bid on larger jobs or take on a larger quantity of jobs. And without those additional jobs, growth is halted.
It can turn into a never-ending cycle.
Construction invoice factoring can seem like a way to help a company or subcontractor escape the cycle. With available funds at hand, taking on more or larger jobs is a possibility that will allow them to expand their business and be more competitive.
The threat of a lawsuit is real in the construction industry, and every contractor knows that.
Even when all safety precautions are adhered to and you strive to work with honesty and integrity, there’s always the chance of someone getting injured or suing you for some other reason.
Having the option of invoice factoring can free up funds in the case of a lawsuit against you.
Losses can come in a variety of ways for construction companies:
No matter what type of loss a company may be facing, invoice factoring can give them the cash they need to meet those losses head-on.
Sometimes the economy can be just as erratic as construction cash flow.
When the economy is booming, we all rejoice and enjoy the ride. But when the economy takes a dive, it threatens to take the construction down with it.
With extra cash on hand, staying afloat during an economic downturn is more possible.
Companies or contractors may need to resort to construction industry factoring when even the most trustworthy clients don’t pay on time. Whatever the reason for their delay, working with a factoring company can help you get the funds you need while waiting for full payment.
Additionally, clients with unrealistic expectations can cause projects to drag on and cost more than you planned. Extra cash on hand allows you to handle the delays and additional costs with a more fluid cash flow.
Whether you need to buy heavy equipment …
… you’ll need cash.
Having a reserve of cash for these unexpected expenses is, of course, preferred. But when that cash reserve isn’t available, invoice factoring may be the way to go to buy needed equipment or replace what’s been broken.
If you’re experiencing any of these cash flow dilemmas, Flexbase can help your company obtain the cash you need to keep working or to grow your business.
With Flexbase capital and cards, financing is fast and easy because we already have the information in our system to do the data analysis necessary. There’s no need to fill out applications or deal with credit checks.
Construction factoring provides the following benefits:
Factoring construction invoices also comes with a downside.
Some disadvantages to be aware of include:
These disadvantaged can make invoice factoring a less-than-ideal solution to your cash flow problems.
So, what is the best alternative to construction invoice factoring? Avoiding it in the first place! Learn more about how Flexbase can help you avoid construction invoice factoring below.
Is negative cash flow dragging you down or threatening the growth or stability of your business?
You don’t need to resort to desperate measures like bank loans or mechanics liens when you take advantage of Flexbase’s invoicing options.
Use our automated invoicing system to streamline the whole process. When customers are late with payments, we’ll send them a friendly reminder, which is oftentimes the only action necessary to recoup payment.
But when those payment reminders don’t do the trick, you can secure working capital with:
There’s no need to complete an application or a credit check. We can quickly perform a data analysis based on the quality of both your company and your clients.
We provide in-house construction factoring that frees you up to focus on your company. We will buy your outstanding invoices at a discount and run point on collecting the payment for you.
And the best part is that our services are available to use free of charge. We don’t get paid until you get paid.
Get Pre-approved for a Flexbase card today.