However, it’s important for construction companies to understand when considering factoring as an option for cash flow. In a practical sense, they consider retainage to be an extra progress payment at the end of a project.īecause retainage is so unique to the construction industry, you won’t hear factoring companies talk about this often. As a result, they will only factor the net invoice, without retainage. Typically, factoring companies will subtract the retainage amount from the invoice before factoring it. An invoice can only be factored for work already completed, before the invoice is due. You cannot factor future invoices, or invoices that are overdue. Main components of invoice factoring in construction The invoiceĪs soon as you submit a construction invoice or pay application to the contractor or owner for work you have already done, you should be able to factor it. They pay the rest – after subtracting the “discount,” or factoring rate – after they receive the payment from your customer. The factoring company pays the subcontractor a percentage of the invoice value immediately. Invoice factoring is a process in which a contractor sells an invoice or group of invoices to the “factor,” or factoring company. Invoice factoring can help construction companies cover expenses on a project before the GC or property owner actually pays their invoice. The delay between invoicing and getting paid can be difficult for companies without sufficient cash reserves. In the meantime, they still have project expenses to meet. If they submit the first invoice after 30 days, they won’t get paid until the GC, architect, and owner review and approve their application. When a construction project is first starting, subcontractors have to wait quite a while before their first payment comes in. There are a number of reasons why a contractor would consider factoring over other methods of construction finance. Video: Is invoice factoring right for your construction business?.Things that affect invoice factoring cost.Main components of invoice factoring in construction.Factoring can help construction companies avoid negative cash flow, providing a flexible and reliable source of capital. Best of all, new debt is avoided and no payments are required by you with a factoring facility. No credit qualification is necessary as the creditworthiness of the business’ customers is relied upon. Future invoices can be sold to the factor as often as needed. When the funds are collected, the factor pays the business the reserve minus fees, which are typically 1-3% per month. In order to protect against billing discrepancies, the factor allocates part of the invoice value to a reserve, as well as taking on the responsibility of collecting receivables within the regular terms of the invoice. Therefore an increasing number of construction companies are turning to invoice factoring, an option that has been around for hundreds of years as an effective method for financing business operations.įirst, a factoring company (or the “factor”) purchases the construction firm’s invoice at a minimal discount, then pays up to 80% of it to the business within 2-3 days. Banks also lack the flexibility that construction firms need for handling short-term variations in cash flow. It requires a lengthy application and approval process, incapable of addressing the immediate need for capital. Traditional financing through a bank or commercial lender is ruled out for most smaller construction firms, and it isn’t a viable option. Reliability and flexibility in accessing capital is key. That’s where invoice factoring for construction comes into play. A reliable source of capital, or hefty cash reserve, is necessary for construction firms to bridge this gap. For many small construction firms, this growth will require further financial preparation and a smooth cash flow. It isn’t uncommon for construction firms to operate in a position of negative cash flow for a while, especially with the costs of paying subcontractors. The construction industry trend is now uphill once again.
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |