Construction factoring is a procedure where the outstanding receivables receive a cash advance. It is different from a loan issued in a traditional financial institution, and the construction business accesses the funding for invoices once the request for invoice factoring is given, often within a few days. Invoice factoring allows construction companies to mitigate cash flow issues to minimize delays in a new project.

Types of Factoring Construction Invoices

Contract Factoring

The approach provides funding for each progress payment. The construction factoring rate for the company decreases depending on the number of invoices involved. Factoring construction invoices guarantee cash flow during the entire timeframe of the project. A factoring invoice sent for the progress payment allows the construction company to receive more cash as soon as possible.

Spot Factoring

A construction company may use this approach when factoring a single invoice to float the required funds immediately. The method is logical when the contracting company has minimal cash flow problems, but a lousy job or a specific event can create a financial setback. Invoices in this approach are more expensive than contract factoring, allowing a company to navigate any problem quickly.

The Pros

• Lower cost: Construction factoring is often cheaper than credit cards. The standard fee for factoring falls between 1-3% each month.
• Immediate cash: Construction factoring enables you to receive funding faster than other financing methods. Factoring allows you to get almost 90% of invoices paid in days and not weeks or months.
• No collateral required: Construction factoring does not require any form of collateral. The factoring company purchases your invoice collection rights, which means you do not have to provide any collateral as the invoice serves as collateral.
• Available to everyone: Factoring is open to companies of all sizes. There are often no requirements for how big or small a company is. Large and small companies can use factoring to facilitate a cash flow depending on the size of their invoice.

The Cons

• Financial privacy: You must provide your financial information to allow the factoring company to access your bank account, invoices, and customer information.
• Not exactly upfront: You only collect money after finishing the work and billing for it. Factoring pays on invoices sent to your customers indicating the work is complete. Factoring may not help if you require cash before the project starts.
• Commercial invoices only: Factoring may not be available when you sell to consumers directly. You factor invoices sent to governments or companies.

Factoring is an excellent option for improving the contractor’s cash flow. Contact us at First Class Lending to learn more about construction invoice factoring.