![]() Employees, rent, and other bills can’t be paid at the same irregular schedule your customer makes payment. That means it’s often hard to keep cash reserves to smooth out payments for payroll and overhead. Unlike other industries, payment doesn’t come right after work is complete – and it’s not uncommon for payment to come months afterward. We mentioned it above – cash flow can be erratic in construction. Cash flow tips for contractors to stay ahead.The construction industry has a cash flow problem – and everyone is paying for it.Let’s look at some of the specific reasons that make construction factoring worthwhile for some construction businesses. Plus, as long as a subcontractor’s factoring company gets paid in full, the subcontractor will only lose a relatively small percentage of the invoice when it’s all said and done. By factoring invoices, construction companies are able to obtain payment for most of their invoice 20, 30, even 40 days earlier than they would otherwise. Why Do Construction Companies Factor Their Invoices?Ĭonstruction payments come slowly. Video: Why Should You Consider Factoring Your Invoices? Every time an invoice for a progress payment goes out, the construction company can get their hands on most of the cash at an earlier date.ĭig deeper: What’s the difference between spot factoring and contract factoring? ![]() When utilized for the entire life of the contract, factoring construction invoices can assure steady cash flow for the duration of the job. Generally, the rate that the factoring company charges will go down when a larger number of invoices are in play. Through contract factoring, cash will be provided in exchange for each progress payment, much in the same way as spot factoring (but on a larger scale). Spot factoring construction invoices tends to be more expensive than contract factoring, and it’s really designed to get a company out of a bind. Spot factoring might make sense where the business generally doesn’t have a lot of cash flow problems, but a specific event or problem job causes a hiccup with financials. When spot factoring, a construction business is factoring a specific invoice in order to float the cash they need right then. Spot factoring refers to a “one-off” situation. Generally, there are two primary ways to factor construction invoices – spot factoring and contract factoring. Once that factoring company is paid for the subcontractor’s work, the factoring company will pay the subcontractor that remaining 20-30% minus the factoring company’s fee.īreaking down the cost of invoice factoring in construction ![]() Then, the bill becomes the factoring company’s burden to collect. Typically, a factoring company will agree to pay out 70-80% of the value of the invoice to the subcontractor well before payment would have otherwise been received. ![]() Video: What is Construction Factoring?įirst, construction invoice factoring requires that a party providing work agrees with a factoring company to factor their invoices. In exchange, the factoring company will provide the construction company cash on the spot. When factoring a construction invoice, a construction company will assign its invoice to the factoring company. Factoring is a process in which businesses (in construction – typically subcontractors) obtain cash advances for their invoices.
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