Last Updated on November 16, 2022
In the construction industry, delayed invoice payments can cause lots of financial trouble. Late payments sometimes mean you need to wait for weeks or even months for customers to pay, creating a frustrating cycle of negative cash flow and mounting debt.
To keep growing your construction company and stay competitive, you need cash to purchase tools, make payments, and pay your team – this is where construction company factoring comes in.
In this article, we discuss how invoice factoring for construction companies works, its benefits, and how it compares to other financing alternatives. Read on to learn how construction factoring services can improve your cash flow and grow your business!
What Is Construction Factoring?
Construction factoring is when your business sells invoices to a third-party company (referred to as the “factoring company” or “factor”) in exchange for a cash advance. Construction companies are often paid with invoices, so there is a possibility of payment delays that lead to negative cash flow. Construction factoring is usually used to access working capital when needed, removing your reliance on customer payment timelines.
Benefits Of Invoice Factoring For Construction Companies
Construction invoice factoring is a great way to unlock funds when customers are slow to pay by replacing delayed customer payments. Check out how factoring your construction invoices can help you access cash when needed:
Get Your Accounts Receivable Invoices Paid In Days, Not Months
The best construction factoring companies fund your invoices within 1 or 2 days. This means you can receive up to 90% of your hard-earned money as soon as possible instead of in 30, 60, or even 90 days.
Access Capital To Grow Your Business While Maintaining Equity
Business owners sometimes must sacrifice equity to fuel growth, but invoice factoring can set them up for long-term success. Factoring construction invoices gives you the cash needed to fund business growth, pay debts, and meet payroll without sacrificing equity or assets.
Get Cash When You Need It Most
Delayed invoices and late payments can disrupt your cash flow, leaving you unable to grow your business. Construction finance factoring offsets late payments and improves cash flow to ensure your company stays financially healthy.
How Does Factoring Construction Receivables Work?
Factoring construction receivables through a factoring company works by turning unpaid invoices into cash for operating expenses and business growth. Factoring also softens the financial blow of late customer payments, reducing uncertainty and letting you make better long-term plans. Instead of waiting on customers to pay their invoices, you can use factoring services to get cash whenever needed.
Here is a guide to getting cash advances from construction factoring services:
Submit Your Unpaid Invoices
Factoring companies accept all kinds of unpaid invoices for factoring. However, they generally favor invoices for creditworthy customers and large or medium-sized companies. Additionally, many typically do not factor invoices for delinquent customers or those with limited credit profiles.
If your invoice turnover time is between 30 and 90 days, your receivables are well-positioned for factoring.
The Factor Advances Up To 80-90% Of The Invoice Face Value
You can generally expect a factoring advance rate of up to 90% of the invoice’s face value, deposited between 24 and 48 hours after submission to the factoring company. The timing of your cash deposit may vary depending on job completion.
The Factor Helps Collect Payment For Your Outstanding Invoices
The factoring company assists your collections team by providing a secure lockbox for your customers’ money and reporting payment progress through an online customer portal. If issues arise, the factor can communicate with customers to resolve them professionally, helping you keep good business relationships.
The Factor Pays Out The Remaining Unpaid Invoice
After payment collection, the factor deducts the factoring fee (typically 1-5% of your invoice) and transfers the remaining invoice balance to your business bank account.
Uses For Your Factoring Cash Advance
Receiving cash advances from construction invoice factoring means you do not have to wait on customer payments to fund your business. Instead, you can eliminate long payment cycles and unlock growth capital sooner to accelerate business development.
Here are some ways to use cash advances from invoice factoring:
Paying employees on time is crucial to running a construction business. Unfortunately, late employee payments caused by invoice delays can reduce productivity and delay construction projects.
Invoice factoring cash advances ensure you can make salary payments on time, improving productivity and employee satisfaction.
Take On New Jobs
You should not be forced to wait for customer payments to clear to take new jobs and grow your business. Factoring for construction subcontractors helps you buy the necessary items to complete jobs while keeping your assets and equity intact.
Pay Operating Expenses
Paying for equipment maintenance, material transportation, and building permits with negative cash flow is difficult. Construction invoice factoring gives you a cash advance to pay those obligations without relying on prompt customer payments or sacrificing equity.
Construction Businesses That Can Benefit From Factoring
Factoring companies offer financing services for subcontractors and contractors of all types. Here are some common construction financing services that are offered:
- Building contractor factoring
- Subcontractor factoring
- Construction factoring for bonded jobs
- Factoring for construction material waste disposal
- Commercial constructor factoring
- General contractor factoring
Invoice Factoring For Construction vs Other Funding Options
In addition to invoice factoring, you have a few other alternatives to improve cash flow. How do these options work, and are they better than invoice factoring? Here is a comparison of the most popular alternative construction financing methods:
Construction Factoring vs Bank Line Of Credit
Many construction companies choose a bank line of credit as their first financing solution. While construction companies tend to have an easier time qualifying for a bank line of credit, the funds it provides may not be enough to grow their business.
Banks typically approve your line of credit application and set your lending limit by looking at your fixed asset portfolio. Construction companies usually have many fixed assets like machines and vehicles, so they may have an easier time qualifying for a line of credit. However, if you are a new construction company that does not have many fixed assets, you may have a harder time getting a line of credit.
Construction factoring is usually the better option for a growing company because the financing company looks at your customers instead of your fixed assets to provide funding. If you work with an established customer base, factoring companies will give you enough working capital when banks cannot.
Construction Factoring vs ACH/MCA Loans
ACH (automated clearing house) and MCA (merchant cash advance) loans are popular because you can qualify and get funds within one or two days. Thanks to their speed and ease of qualification, ACH and MCA loans are popular among multiple business types.
However, ACH and MCA loans often have high lender and interest fees that can reach 60% of your initial loan amount. If you do not know how to manage large amounts of debt, your company can fall into deep financial trouble.
Construction factoring is usually less risky because it uses invoices as collateral, which customers will eventually repay. Because you are almost certainly repaying your cash advance, you do not have to stress over debt repayments.
Construction Factoring vs Quick Pay Discounts
Offering customers discounted rates for paying their invoices before the due date can improve your cash flow when necessary. However, this method heavily depends on your customers’ priorities.
If your customer prefers having more cash on hand, they may simply ignore your discounted rates and pay their invoice when it’s due, leaving you short on cash and unable to grow your business.
Construction factoring is usually more reliable because you are guaranteed to get a cash advance as long as your invoices are approved.
Typical Construction Invoice Factoring Rates And Fees
Your invoice factoring fees depend on how much you plan to factor and how long customers take to pay. Factoring high amounts and getting customers to pay faster give you the best construction factoring rates. Factoring companies typically also consider other factors like your time in business and customer credit quality.
When factoring an invoice, two types of fees are typically charged:
- Initial fee: This fee pays for your invoice factoring expenses for a set initial period (typically the first 30 days) of your cash advance. It generally costs 0.90-3.50% of your invoice’s total value.
- Incremental fees: These fees cover invoice factoring expenses beyond the initial fee period. They generally cost 0.25-1.50% of your invoice’s total value.
Requirements To Apply For Construction Factoring
There are a few requirements to be eligible for construction factoring cash advances. Here are the documents you need to get your application approved:
List Of Existing And Potential Customers
As part of your qualification process, the factoring company will need a list of your existing and potential customers to review their credit quality and determine factoring eligibility.
The factor will require a completed application form to begin the factoring process. The documents listed below are also typically necessary to provide alongside your application:
- Business ownership identification
- Personal identification
- Employer Identification Number
- Customer contracts
- Articles of incorporation and other relevant corporate documents
Accounts Receivable Aging Report
Accounts receivable aging reports list all your invoices based on their due dates. The factor will need this report to research your customers’ payment behaviors and determine whether they are eligible for factoring.
The factor will typically consider invoices that are 30 to 90 days outstanding, but invoices for customers who state they cannot pay may be ineligible for factoring.
Frequently Asked Questions About Factoring With altLINE
Here are some typical questions about factoring for companies answered:
Do you need to run a credit check before getting started?
altLINE runs a credit and background check on all company owners that apply for factoring with us. However, there are no minimum credit thresholds for approval. Background checks are reviewed for financial-related crimes or felonies. In the event a borrower has a spotty background, approval with altLINE may be in question, but in the event the borrower is disqualified, altLINE will often work with the borrower to find a factor that is willing to help.
Do you require UCC filings when factoring invoices?
Upon executing a term sheet, altLINE will file a UCC on the client’s business. This UCC filing allows altLINE to properly secure the collateral (i.e. the invoices) it plans to advance against when the factoring facility is in place. UCC filings are an integral part of any form of lending.
Is factoring a debt or loan?
Invoice factoring is neither debt nor a loan. Invoice factoring is the sale of your invoices to a third party. The money advanced against these invoices will be repaid by your customers.
However, altLINE is a recourse factor, so you may need to pay the cash advance back if your customer fails to pay their invoice.
Do you offer non-recourse factoring?
altLINE only offers recourse factoring. While you must repay the cash advance if your customer fails to pay, recourse factoring structures often allow for factors to extend lower rates and larger credit limits on your customers.
Jim is the General Manager of altLINE by The Southern Bank. altLINE partners with lenders nationwide to provide invoice factoring and accounts receivable financing to their small and medium-sized business customers. altLINE is a direct bank lender and a division of The Southern Bank Company, a community bank originally founded in 1936.