How to Use Factoring to Add Support to Your Construction Business
For several years, the construction industry teetered on a ledge of uncertainty as the housing market and stalled economy had many investors unwilling to pull the trigger on new developments. As trends reveal strong growth for both commercial and residential sectors, it seems that those in construction are looking at some very busy schedules in the coming years. Although a booming industry, construction is a hard venture to finance. Apart from the labor demands and licensing requirements, heavy and specialized equipment costs can stunt growth and new project acquisitions for smaller companies. For these owners, construction industry financing options become important.
Many small businesses rely on factoring to bring in quick cash to their operations. In these situations, companies sell a batch of debtor invoices to a lender in return for cash. The lender assumes the control of the invoices, but only offers the company a portion of the actual value. While an expensive option, it
can be an avenue of bringing in funds when customer payments or income streams have dwindled.
With the construction industry, there are some unique problems encountered when following the factoring process. These deal with the industry-specific nature of invoices and services rendered, as well as the payment contracts most contractors establish. Construction companies usually offer extended payment terms, with invoices receiving 45 to 60 day billing options. Additionally, these contracts may also include language concerning the scope of the work and to-date accomplishments on the project timeline. These can be a headache when trying to establish how much of the bill is due and at what time.
Other concerns include:
- Lien releases. Contractors issue a lien release (asset no longer belongs to the contractor) for materials or services rendered on the job once payment for the service is received.
• Lien laws. The terms of lien releases and control are vary in each state and are always changing.
- Contract terms. Contracts include terms which conflict with standard receivable practices such as as “paid when paid” and “paid if paid”.
• Progress payments. Contractors issue bills throughout the building process according to activity/accomplishment milestones.
• Retainage. – Contractors generally will withhold between 5 to 10% during each billing until the building project is complete.
There are factoring lenders who have specific experience with construction industry financing and can help wade through the confusion to offer the capital you need. If your company needs a cash boost, consider how factoring can be of assistance.