A Guide to Construction Invoice Factoring

Most construction projects require general contractors and subcontractors to cover the cost of labor, materials, equipment, insurance, and other overhead expenses. But they may not receive payment until weeks or months after the work is completed.

That’s why contractors often turn to construction factoring for cash flow. If you’re in the construction industry, we’ll explain when to use invoice factoring and how to use it to run and grow your construction company.

Why Is Invoice Factoring Common in the Construction Industry?

Construction business owners often use invoice factoring due to the nature of their work. For example, a job might entail giving an estimate, winning the bid, doing the work, staying on top of the paperwork, and getting paid.

Jobs are typically invoiced with payment terms between 15 and 90 days. But things don’t always go smoothly, and late payments happen. In addition, projects can be underestimated, materials and labor expenses can go over budget, and permits can be delayed.

As a construction contractor, you foot the bill for the project upfront, but you don’t get paid immediately after the job is done. Plus, to take on other construction projects, you’ll need cash to meet payroll and purchase materials.

Instead of waiting for homeowners and real estate developers to settle their accounts, you can take advantage of accounts receivable financing to get paid earlier than you would. As a result, you can avoid cash flow problems and have working capital when you need it.

How Does Invoice Factoring Work?

Invoice factoring is a type of financing where you sell your unpaid invoices to a lender, referred to as a factoring company. This is why factoring isn’t technically a loan but a cash advance for your accounts receivables in exchange for a fee.

The factoring company advances you a percentage of the outstanding invoices, typically around 70% to 100% of the total invoice value. When the invoices come due, the lender collects payments directly from your customers. Then, they deduct the factoring fee and pay you the remaining balance.

For example, say you have $10,000 of outstanding invoices in December. It’s January, and you haven’t received payments yet. You know from experience that your customers may not pay for another 30 days. But you need cash to pay for insurance and wages and buy materials for the next job.

So, you decide to factor the whole amount with a construction factoring company. They’ll give you a 90% advance and charge a 2% factoring fee over 30 days. You receive cash upfront for $9,000 ($10,000 x 90%).

When your customers pay, the factoring company pays you the remaining balance of $1,000 ($10,000 x 10%) minus the factoring fee of $200 ($10,000 x 2%). In this case, you’ll receive $800 ($1,000 - $200).

How Much Does Invoice Factoring Cost?

On average, factoring fees range between 1% to 5%. Factoring rates depend on the lender, and they’re calculated based on several criteria, including:

  • The volume of the outstanding invoices you want to factor: Lenders consider volume a significant aspect when calculating factoring rates because they want more business. That’s why many factoring companies offer volume discounts. The larger the monthly amounts a borrower factors, the lower the fees.

  • The creditworthiness of your customers: Factoring companies will charge higher rates if they determine your customers have low credit scores. You’ll also have difficulty factoring invoices for customers who don’t pay on time or have a history of not paying.

  • Length of time it takes your customers to pay: Lenders usually calculate rates using a variable fee structure or a flat fee. With a flat fee structure, factoring companies charge a one-time fee upfront, and you don’t pay any more fees until they collect on the invoice. With a variable fee structure, you’re charged a discount rate of 1% to 5% as long as the invoice isn’t paid. So, the longer your customers take to settle their accounts, the more you’ll pay in fees.

When Does It Make Sense for Construction Businesses To Use Invoice Factoring?

Businesses in the construction industry use factoring when they need cash while sitting on unpaid invoices. Since late payments and delays are common, companies and subcontractors without cash reserves use construction factoring services to get paid earlier for services they’ve delivered.

Invoice factoring companies provide an alternative financing option that can be easier for small business owners to get approved for. Bank loans often have strict requirements that new businesses or startups may not qualify for. For instance, banks may require a certain amount of annual revenue that individual contractors can’t meet.

And unlike other funding options, such as business lines of credit or short-term loans, factoring companies don’t require credit checks since the invoices act as collateral, allowing contractors with poor credit scores to get funding.

Plus, this type of financing tends to have low documentation and an easy application process. That’s why it’s a popular solution for companies and contractors who need funds fast.

Not to mention the administrative work involved in invoicing and chasing customers for payments can take a lot of time. So, construction financing offers a solution where you can get your money upfront and outsource the collection of your unpaid invoices to the factoring company.

How To Get Invoice Factoring for Your Construction Business

It can be difficult to manage your cash flow or grow your business if you don’t know when you’re getting paid. Luckily, you can plan the next step for your company with funding from invoice factoring.

Follow these steps to get the funding you need.

1. Gather the Required Application Information

The first step is to make sure you have all the documents you need. The requirements depend largely on the lender. But the documents you’ll typically be asked to provide include:

  • Legal identification documents: Examples include your driver’s license, passport, employer identification number (EIN), and Social Security number (SSN).

  • Business documents: These are documents that prove the legality of your company, such as any business licenses, Articles of Organization, or Articles of Incorporation.

  • Tax returns: Be ready to show your most recent (at least two years) business and personal tax returns.

  • Accounts receivable aging report: This report has your business’s current and most recent outstanding invoices. Factoring companies use the information you provide to check your clients’ creditworthiness. They’ll also use the document to track the invoice amounts and payment dates.

2. Choose an Invoice Factoring Company

Before you hand over documents containing sensitive information about you and your company, make sure you work with a legitimate factoring company. Check their website and read customer reviews to know more about their policies and how they conduct business.

When researching factoring companies, pay attention to factoring rates, any additional fees they may charge, and how much advance you’ll receive upfront.

If you don’t have the time to research the overwhelming number of factoring companies, let Clarify Capital do it for you. We offer invoice factoring with low rates and no credit checks, and you can get up to 100% of your invoice value funded!

3. Apply for Invoice Factoring

Now that you have your documents ready and have chosen a factoring company, it’s time to send in your application.

For example, you can expect a quick and easy application process with Clarify Capital. You can also call us to discuss your funding options based on your business needs. Fill out our online application form — it takes just two minutes.

4. Receive Invoice Factoring for Your Construction Business

One of the advantages of invoice factoring is its fast and easy application process. You can even get approved on the same day if you meet the lender’s criteria. As a result, your construction company can access cash within a day or two.

Get Construction Invoice Factoring Now With Clarify Capital

Whether you’re a general contractor or specialize in framing, roofing, or landscaping, your goal is to grow your construction business. But if you have irregular cash flow, it could be difficult to pay for operating expenses. It could be even more challenging to bid on larger jobs that pay more.

Give yourself a break from constant cash flow issues and use your accounts receivables for financing. Contact Clarify today and get access to capital through invoice factoring.

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