Understanding construction invoice factoring
Construction work is largely seasonal. On top of that, owning a construction company comes with many expenses due to the large and expensive nature of most construction projects. This can restrict cash flow and result in problems with helping your company grow. To avoid these problems, consider construction invoice factoring.
What is construction invoice factoring?
Construction invoice factoring is when you take the invoices owed to you by your customers and sell them - usually at a discount - to a third party. The company that buys your invoices becomes responsible for collecting payment on the invoices while you have cash in hand. This can help you get started on immediate projects or simply help support your cash flow needs when it is an off season for construction.
It's important to note that construction invoice factoring is different from accounts receivable financing. In financing, you are required to pay back a loan that is made with your invoices acting as collateral. With factoring, you're actually engaging in a sale of assets. You don't have to pay the money back to the third party, and you don't have to pay finance charges other than transaction fees.
Construction invoice factoring is also slightly different from factoring services for other types of business. Factoring companies who work with construction businesses must have special skills to deal with often-complicated billing processes. It's also a riskier type of factoring and may require a larger fee than others.
When should you use invoice factoring?
Any time you have difficulty raising enough capital for expansion should be considered a good time to turn to construction invoice factoring. It can be difficult - especially in today's climate - to get traditional business financing from a bank. If you want to expand your trucking business for example, you may find that you don't have the cash needed. Through truck factoring, you'd be able to remedy this problem.
While you don't get the full cash value of your invoices, you do get the up-front capital you require to grow your construction business.
Choosing a factoring company
Make sure you choose your factoring company wisely. This company will work with your customers to collect on invoices, so you want to ensure that things are handled in a professional and courteous manner.
Offer invoice samples for the factoring companies to review, and get a quote based on the number of invoices that you can factor. Make sure to account for a company's experience and size when making your decision. You can also check with the Better Business Bureau and with other customers who have used factoring services before committing to a factoring contract.
Ready to factor your construction invoices? Use BuyerZone's free request for factoring price quotes service, and get matched to multiple factoring companies in your area.
