Construction invoice factoring what it is who needs it and how to avoid it

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Zaid Rahman
December 1, 2021

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 be the help you need to get or stay on your financial feet.

In this article, learn everything you need to know about invoice factoring and how it can help you have the funds you need when you need them.

Table of Contents

Flexbase: Streamlining Invoicing Processes Is One Part of Our Cash Flow Management Solution

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:

  • Friendly payment reminders
  • Legal notices
  • Lien filings
  • Flexbase capital

With Flexbase, you can stay cash flow positive despite the financial obstacles that may be in your way.

What Is Construction Factoring?

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 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.

How Does Construction Factoring Work?

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:

  1. Before - Research

    • You’ll need to make sure that you qualify for factoring by identifying outstanding invoices that are between 30 and 120 days old.
    • Research factoring companies to learn their experience level, their rates, and what other fees you may be charged.
    • Once you’ve settled on a factoring company, complete their application and sign the agreement. Pay special attention to the fees, payment plan, and cash advance amount.
  2. After signing - Communication with the client

    • After signing the agreement, you’ll be given an advance rate — usually 70 - 90% of the invoice amount.
    • The factoring company will notify your client of the factoring agreement you’ve made along with instructions on how they can pay the invoice directly to the factor.
  3. After invoice payment - Final accounting

    • After the client has paid the invoice in full, the factoring company will communicate with you regarding any remaining balances.
    • The factoring company’s communication to you will include information on the “reverse amount” — the amount the factoring company will charge you for the service they provide.

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:

  • The factoring company you choose advances you 80% of the invoice value equalling $8000.
  • You sign the agreement and receive the $8000 in under three days. The agreement also clearly states that the factoring rate will be 1% over 30 days.
  • The payment is made within 30 days, and the factoring company charges you the 1% factoring fee, which equals $100.
  • After the client pays the invoice in full, the factoring company will send you the remaining amount of the invoice (20% or $2000) minus the factoring fee ($100). In this case, you’d receive $1900 ($2000 - $1000 = $1900).

Who Can Use Construction Invoice Factoring?

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.

7 Reasons Why Construction Invoice Factoring Is Needed

Construction companies incur a myriad of expenses:

  • Payroll
  • Equipment
  • Office space
  • Utilities
  • Vehicles
  • Supplies
  • Insurance
  • Legal fees
  • Marketing
  • And more

When the funds aren’t available to meet these regular expenses, the construction company may need to turn to construction invoice factoring to fulfill their financial responsibilities.

Companies using the right invoicing system like the one provided by Flexbase should be able to regularly take care of their day-to-day expenses. But whether they are using a quality invoicing system or not, other unexpected issues may arise, leaving them needing immediate cash.

Below are seven common reasons a construction company may employ the services of a construction factoring service.

#1: Cash Flow Problems Due to Payroll or Overhead

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. that won’t wait until you receive payment for work done.

Factoring invoices may provide you with cash up front to take care of those expenses until you are paid for your services.

#2: Bidding on More or Larger Jobs

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.

Invoice factoring can 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.

#3: Threat of a Lawsuit

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.

#4: Pay for Unexpected Losses

Losses can come in a variety of ways for construction companies:

  • Equipment breakdowns
  • Natural disasters or storms
  • Underestimating the project scope
  • A workers’ strike

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.

#5: Economic Downturn

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.

#6: Clients Who Won’t Pay or Have Unrealistic Expectations

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.

#7: To Buy Heavy Equipment

Whether you need to buy heavy equipment …

  • To grow your business; or
  • To replace equipment that is broken

… 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.

2 Types of Construction Factoring

Two types of construction factoring may be offered by a factoring company:

  1. Spot Factoring - This type of factoring is used when a company needs cash right away and needs to factor 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.
  2. 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.

The Advantages and Disadvantages of Construction Invoice Factoring

The Advantages of Construction Factoring

Construction factoring provides the following benefits:

  • Fast cash
  • Lower cost
  • Usually no credit check
  • No collateral required
  • Improves relationships with clients and workers
  • Can be a long-term option
  • Available to everyone
  • Fewer collections

The Disadvantages of Construction Factoring

Factoring construction invoices also comes with a downside.

Some disadvantages to be aware of include:

  • The service comes at a cost that can eat into a company’s profit margin.
  • It can be difficult to find a factoring company willing to take on the inherent risk that comes with the construction industry.
  • Factoring is only available for work already completed, not for upfront costs.
  • Most factoring companies only want to take on invoices from good customers. If they have a history of paying late (or not at all), the factoring company may not be willing to take on the risk.
  • It cuts off some of the communication between you and the client, which can add stress to the relationship.
  • Factoring is available for commercial invoices only.

Bank Loan vs. Construction Factoring

Bank Loan Construction Factoring
- Loans depend on the company's credit history.

- A bank is less likely to provide a loan to a company with a negative credit history.

- The credit history of the construction company isn’t as important since they are working directly with the customer.

- More weight is placed on the customer’s payment history.

Requires lots of paperwork and red tape Less red tape required
Collateral is necessary to secure a bank loan. No collateral or assets are necessary. The invoice is the only asset in question.

Debt Collections vs. Construction Factoring

Both debt collections and factoring companies deal with invoices on work you’ve already completed. They also are more concerned with your customer’s credit history than your own.

Despite these similarities, debt collection and factoring companies are very different.

  • Factoring companies like to buy invoices from your good customers and may issue cash when you send out the invoice or even before it’s due. (In most cases, though, factoring is used for late payments.)
  • Debt collection agencies will usually only give you cash for past-due invoices.

How Flexbase Helps Contractors Manage Cash Flow and Avoid Construction Invoice Factoring

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:

  • Flexbase capital; and
  • Flexbase cards

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.

Schedule your free demo today.

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