Construction Invoice Factoring Boosts Cash Flow For Builders in Tough Economy

The auto industry is getting all the attention during this recession but the construction industry is quietly feeling the pain also. You hear a lot about “housing starts,” “sales of new homes” and “sales of existing homes” when analysts are discussing economic indicators but rarely do you hear a company mentioned by name. That’s because there are so many more players in the industry and no single entity receives as much attention or has as much impact as a company like General Motors does for auto industry. But that doesn’t mean that there are not just as many challenges for builders and contractors both large and small.One of the major challenges facing the construction industry is financing. Credit is tight and there are many builders eager to move forward with projects that can’t get the capital do get a project started or an existing project completed. That is where construction invoice factoring is a necessary and logical alternative.During the course of any construction project a builder, contractor or sub-contractor is likely holding a substantial amount in receivables. They have performed a task or even finished a project and are waiting to get paid. These days, every company is waiting as long as possible to pay their bills so the builder is waiting up to 90 days or longer to receive payment. Meanwhile, the builder has expenses that must be paid such as salaries, maintenance, rent, etc. Getting financing from a bank to keep the business solvent is difficult, to say the least.However, the fact is that the outstanding invoices that a builder is holding are an asset and have a value. Construction invoice factoring allows the builder to leverage this asset to free up much needed cash to pay expenses. After all, it’s all about cash flow and if cash isn’t flowing in then there is no cash to flow out.Invoice factoring is the practice of “selling” invoices to a company or individual called a factor. The factoring agent provides the builder with a percentage of the face value of the invoices, typically 70-90% depending on the payment history and credit worthiness of the invoiced companies. When the bills are finally paid the factor provides the balance of the amount due less a small percentage for the service. This “fee” or “rate” ranges from 1-5%.The key benefit of construction invoice factoring is that the builder or contractor ends up with cash in hand quickly, often in 24-48 hours. And the cash they are receiving is their money, not funds that must be repaid to a bank over time. This allows a builder to stay current with their payables and invest in items, like equipment, that will make their business more efficient and more profitable.Construction invoice factoring has, in the past, been viewed as an expensive proposition and the action of last resort. But more builders, along with members of many other industries, are reconsidering the value of receivables factoring. In a tight credit market, invoice factoring is keeping many companies in business. Even some banks have started to appreciate the benefits of receivables factoring and are starting divisions to offer this service.Sometimes it takes adversity to highlight a formerly underappreciated service. And in a recession where much of the focus is on activity in the construction sector, construction invoice factoring has become a financial lifeline for many builders and contractors, both small and large.