Most business owners in construction understand that obtaining financing can be a challenge. Due to the several variables that impact this industry compared to others, many banks aren’t willing to take on the risk of construction lending. Fortunately, there are other great options such as construction factoring, which is a convenient and cost-effective way to normalize cash flow in this particularly volatile industry.
Construction Factoring vs. Bank Construction Lending
There are several industries that financial institutions have a harder time approving for credit. Perhaps the two that are most risky in their eyes are restaurants and construction. Unlike restaurants, however, construction businesses don’t tend to fail within two years of starting up—in fact, many tend to get stronger over time. Instead, banks often consider the many variables that stall or complicate construction projects as a significant risk to expecting timely repayment on a loan.
Construction factoring, on the other hand, is a great alternative to bank financing for business owners in the industry. Like many other businesses, construction relies heavily on accounts receivable in the form of subcontractor invoices and employee obligations. As a result, cash flow snafus are almost always to be expected. Factoring is an excellent way to leverage accounts receivable to ensure that cash continues to flow where it’s needed, when it’s needed.
Why Factoring for Construction Works
To put it simply, factoring is a method of borrowing against the money locked up in accounts receivable to help a business finance on-going projects or boost its cash flow. The procedure involves selling invoices to a third party company, known as a “factor,” which then advances a reduced percentage of the accounts receivable value. The factor will then begin collecting on invoices until the total amount is received. The difference between the amount collected and the amount advanced will then be forwarded, minus a nominal discount rate, to the business once the factoring process is complete.
Because positive cash flow is such an important aspect of a smooth-running construction business, factoring can be a particularly valuable tool for staying one step ahead of the rest. Advances can also be used to purchase new equipment and supplies if needed. Moreover, the process is not only quicker and less paperwork-intensive than bank financing, but it can also be considerably less costly over time. This means more money and time to focus on getting projects done without the worry.
As the demand for new construction continues to grow, there needs to be better options for maintaining a healthy cash flow at all times. By taking advantage of construction factoring, businesses in the industry can finally have peace of mind in knowing that delays or last minute changes to projects will not keep them from getting the job done.