How "Factoring" Provides Access to Working Capital

Being a contractor in today's environment is extremely difficult. Banks are not lending and contractors are reliant on their customers to pay their invoices in a timely manner, which most of the time means 30-60-90 days. All the while you’re expected to make payroll, pay vendors and try to grow your business. This is impossible without access to working capital and if a bank won't lend you the money you have got to either:

  1. Turn down jobs
  2. Find jobs where GC’s/owners pay promptly, which aren’t abundant because most contracts are “paid-when-paid”
  3. Find an alternative solution to improve their cash flow

Subcontractors bear most of this burden because they are furthest from the cash flow. On top of the slow payment terms, most general contractors or owners hold a 10% retainage from each pay application, further crippling their cash flow.

One increasingly used solution is called factoring. Factoring provides relief to contractors by giving you access to immediate working capital without any additional burden on the general contractor or owner to pay quicker than they normally would. Factoring allows contractors to consistently meet their payroll, pay vendors timely and bid on more jobs they otherwise couldn't. Here is how factoring works:

  1. A contractor sends the factoring company an invoice for work they've completed. 
  2. The factoring company wires up to 80% of its value into the contractor’s bank account that day, then holds the remaining 20% in escrow.
  3. The contractor’s customer sends the factoring company the payment when the invoice is due.
  4. The factoring company remits the balance of the escrow less a fee to the contractor.

It's fast, it's flexible, and it allows small and growing contractors to maintain steady cash flow and bid on more jobs.

Benefits of working with a factoring company

Where banks will consider whether your company is financially sound when deciding to approve a loan, factoring companies don’t look at the size of your business or your creditworthiness. In fact factoring companies look at the creditworthiness of your customers. So just about any contractor that has a creditworthy commercial customer base with invoices for products delivered or services rendered to another business or government agency can benefit from factoring.

Construction focused factoring companies 

Most factoring companies choose one or more industries to specialize in such as transportation, staffing and construction. When you choose to work with one who specializes in construction you get the benefits of working with a partner who really knows your industry and can help you navigate some of it’s challenges.

Once the contractor submits an invoice to their factoring company, the factor will pay the vendors right away. The quick payment to the vendors often allows the contractor to receive early payment discounts that they otherwise would not receive.

Understating the lien laws can often be challenging for contractors. Often times factoring companies who specialize in construction understand the lien process and can help you with a basic understanding of lien laws in your state as well as get the lien releases for you. Additionally, they often subscribe to a service that gives updates on the latest changes to the lien laws by state to help you stay current with the laws for your area.

Small and growing contractors don’t always have the staff to operate as an accounts receivable department like larger companies might have. The factoring company can step in and provide some of these services. From paying your subs and suppliers to helping you manage the financial aspects of the project factoring companies can be a great asset. There are also additional back office services a factoring company brings to the table such as helping you ensure you have signed and executed contracts, your contracts are bonded and you have the key contacts for the job including information on the GM, the owner and who is in accounting to help ensure you are going to get paid.

Factoring may not be the right fit for everyone, but with factoring volume at over $88 billion in 2011 (according to the 2011 highlights of the Commercial Finance Association’s Annual Asset-Based Lending and Factoring Survey) many companies see it as their key to cash flow security and growth.

Brad Beck is director of business development at CapitalPlus Equity, a factoring company assisting construction companies with their cash flow needs. Contact CapitalPlus Equity at 2510 Solway Road, Knoxville, TN 37931; phone: 866-227-7587;