Receivable Financing / Invoice Factoring for Construction Sub-Contractors
Spergel Corporate Finance (SCF) President Glen Dalzell explains that invoice factoring for the Construction Industry can help your business fix cash flow problems and raise immediate funds.
Factoring is a financial solution used by companies in many industries to solve cash flow challenges by converting their accounts receivable into cash. Historically, it has been difficult, if not impossible to factor construction receivables due to the industry norms of construction holdbacks, progress draws and construction liens. These potential issues have caused most factoring companies to avoid the construction industry altogether. In order to successfully finance clients in this industry, the funder must be a specialist that knows the ins and outs of the business. Until recently, this type of funder was simply not available in Canada.
SCF has recently established a relationship with a funder that is an expert in financing construction receivables.
What Is Construction Invoice Factoring?
Construction invoice factoring is a financial transaction that allows construction companies to sell their current invoices to a third party factoring company in exchange for immediate cash. It is common for construction sub-contractors to wait up to 90 days for payment from general contractors and commercial clients.
By factoring their invoices, sub-contractors can eliminate this nagging cash flow problem by receiving immediate payment for outstanding invoices. This allows them to move on to the next job with the working capital needed to make payroll, purchase materials and pay bills on time.
What does a typical construction industry client look like?
- Early stage start-ups that do not yet qualify for traditional bank financing.
- Rapid growth companies that need more working capital than their bank can provide.
- Organizations facing financial challenges that disqualify them from traditional bank financing.
- Annual sales greater than $1 million (monthly receivables of at least $100,000).
- Diverse customer base with no more that 30% concentration with any one general contractor or commercial customer.
How Does it Work?
- Sub-contractor presents invoices for completed work that have been signed off by the customer.
- Initial advance of 75% of the face value of the invoice is paid to the sub–contractor by the factor.
- Sub-contractor selects which invoices to factor and when.
- The customer pays the factor directly or submits payment to a control account at the sub-contractor’s bank.
- Once the payment is received from the customer, the sub-contractor will receive the remaining 25% less the factoring costs.
- Factoring does not show as a debt on the balance sheet. It is simply a conversion of accounts receivable into cash.
Qualifying for Invoice Factoring
A general lack of understanding of this process may stop many business owners from considering invoice factoring. However, it is very simple and not difficult to qualify. We work with industry specialists in factoring construction receivables. There are no long-term contracts, no monthly minimums or penalties for non-usage.
Should you use Invoice Factoring?
Is invoice factoring the right fit for your construction business?
There are many benefits to invoice factoring for construction industry sub-contractors. It gives them the ability to offer customers payment terms up to 90 days without damaging their cash flow. Simple qualification requirements make applying a cinch. Factoring is also a very flexible option for business owners – they only need use it when they need it.
If you would like to discuss Construction Invoice Factoring, please contact me directly at the coordinates below. I would be pleased to speak with you.
The Spergel Corporate Finance Advantage
At Spergel Corporate Finance we are dedicated to helping businesses achieve their goals. We act on their behalf, sourcing the appropriate funder(s) to maximize proceeds while minimizing costs. We want to provide the peace of mind of knowing that you don’t have to worry about running out of the cash necessary to run your business effectively.
We guarantee fast service, an easy to follow fee structure, no long-term contracts and financing that is customized to fit our clients’ needs.