Invoice factoring for construction companies
A comprehensive guide to construction factoring
Construction factoring, like other forms of invoice finance, allows construction companies to access money from unpaid invoices prior to client payment. This can be a particularly useful form of finance for construction companies because payments are generally settled more slowly than in other industries.
Funds borrowed against your invoices can be used for a number of purposes, from paying contractors and subcontractors to supplier and office expenses.
How does construction factoring work?
Construction factoring is a provided service by factoring companies or invoice financing companies. Factoring companies are essentially lending platforms that secure loans against your unpaid invoices, as opposed to using asset security. Usually these are shorter-term lending platforms (between a 1- and 6-month loan period on average); however, depending on the provider, the loan term can vary significantly.
Construction factoring is a type of invoice finance that generally gives the factoring provider greater control over your invoice payments as they take over the role of debt collection. This is preferable to some companies as it can take the debt collection strain off a construction business that has other integral focuses. However, other companies may prefer a different form of invoice financing in order to maintain customer relationships on their own terms.
How much does construction factoring cost?
The cost of construction invoice factoring will depend largely on your business credentials, annual turnover and client viability.
Construction factoring companies often do not use per annum interest as payment for their services, but instead make their money by charging fees and/or daily interest on loans. This is because their loans are usually of a shorter term than standard personal loans.
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Will construction factoring help my business?
Using a factoring provider for a construction company can be beneficial for your business, particularly in terms of business growth. Accessing money from unpaid invoices may enable your business to employ more contractors and take on more jobs.
It may also serve to protect you from late payments by clients, particularly as the role of debt collection is transferred to the factoring company, which will have experience in payment collection and will likely employ legal aid should they need to.
Different types of construction factoring
- Spot factoring – spot factoring is what refers to single invoice factoring. Construction companies can choose to factor individual invoices ahead of payment, should they require the funds. This can potentially help companies in difficult last-minute financial situations.
- Contract factoring – contract factoring is a larger scale of invoice factoring for construction companies. With contract factoring, businesses can integrate their accounting system with a lending provider and potentially finance all of their upcoming invoices on request.
Pros and cons to construction factoring
- Access invoice payments early and support cash flow
- Have a buffer in case of late-paying clients
- Shortcut to growth
- Only pay for what you borrow
- Get expert advice from providers who specialise in construction factoring
- Few invoice financing companies provide factoring for construction companies because of the unreliable payment periods associated with construction work
- Can be expensive, depending on your provider and the loan period
- Potential damage to client relationships when using a third-party provider for debt collection services
How do I get approved for construction factoring?
To get approved for factoring, you will need to apply to an invoice finance provider using your business details and data. Some providers will check your credit score and others may not, as some companies deem your eligibility based on your business's annual turnover, as well as the credibility of your clients. If you are an Australian B2B company with credit-worthy clients and an annual turnover of above $500,000, you will generally qualify for invoice factoring (but all providers have different requirements).
A factoring company will consider your construction business's viability for funding and if approved, will allow you to borrow money (usually about 70%-90%) from your unpaid invoice security almost immediately, as opposed to waiting weeks or months for payment. The 10%-30% of payment that is withheld is used to pay your fees and/or interest charges for the loan. Generally, companies that withhold larger percentages of invoices only take a portion of the withheld amount and will transfer the rest of the paid invoice to you upon full payment.
It is always a good idea to compare providers prior to submitting an application.
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