Can You Use Invoice Factoring as a Construction Subcontractor?
Throughout the construction industry, subcontractors face the frequent problem of being paid 30 to 60 days after they have purchased materials and started their work. For many individuals and smaller businesses this creates difficulties with liquidity and cash flow. Purchasing materials and paying workers requires money before payment is received. Invoice factoring, or accounts receivable financing, is one way for a subcontractor to receive money when needed.
Understanding Invoice Factoring
When you create an invoice for work that will be completed, invoice factoring companies may purchase that invoice. They provide a percentage of the invoice directly to you, eliminating the necessary waiting times that come with receiving payment. When the people who hired you to complete work pay their invoice, they submit payment to the factoring company. The difference between the percentage you were paid and the amount of the invoice is kept by the factoring company as their profit for the transaction.
Benefits of Accounts Receivable Financing
Many construction subcontractors benefit from the increased liquidity of cash flow that is generated by this financing method. This increased money is highly accessible, allowing you to purchase materials and equipment while paying your workers. It also allows you to access growth opportunities presented by taking on larger projects that you may not otherwise have the cash to access.
Challenges in Invoice Factoring Faced by Construction Subcontractors
While factoring can help subcontractors overcome many financial struggles, this option is not available to all construction subcontractors. General contractor policies and the agreement with the policy owner can prohibit factoring by subcontractors. Lien laws also play a role in how subcontractors can access accounts receivable financing.
Factoring also does not pay as much as waiting for a general contractor to pay an invoice. Many factoring companies only pay approximately 75 percent of the total invoice up front, and will deduct any fees from the remaining 25 percent before paying it. If the costs of factoring were not included when your bid was placed it may negatively influence the budget for the project or your bottom line.
For many construction subcontractors, accounts receivable financing is a viable and productive way to make sure there is cash available for necessary projects. It is most beneficial if you have completed a plan and done the math necessary to make sure you can afford to pay your debts and the fees associated with factoring. It is also only viable if you are aware of the laws and stipulations regulating the construction industry regarding finance options.