Construction Factoring Can Help Your Bottom-Line

Construction Factoring can carry you through the tough times

Construction Factoring

Hi Diane, I am a newly established construction business struggling with cash flow issues.

I met with an agency in Arizona (where I am located) in August 2002 that offered a service lending money to contractors that have signed contracts in place, but have not collected yet.

Unfortunately, I do not have the name of the company or even know where to begin to find it.

Essentially, I am looking for someone that loans based on contracts or monies that have been invoiced in an effort to keep operating.

I have huge potential and just started full time in January of this year and am very busy with one fulltime crew, yet I am struggling to begin my next job as I am not yet established enough for vendors to open accounts, etc, therefore, I am paying cash up front for everything and in turn waiting to get paid.

Would you be of any assistance on where I could call or even the name of this type of service I am looking for? Please respond via email if you get a chance.

Thanks for your help, by the way, very nice site with multiple information of great use!

Mike S., Owner/Operator Copper Creek Pipelines & Excavation, LLC



Hi Mike! Thanks for writing! I know what you mean. It is tough getting going. We have been at it for several years now and it is still tight sometimes.

In regards to finding the company in Arizona, check with your Chamber of Commerce. They may be able to help and/or they may be able to send you in the right direction.

The type of setup you're describing is usually termed "factor" or "factoring receivables".

Unlike borrowing money to meet cash flow needs, construction factoring does not create debt. Getting a loan, or going into debt, is not only time consuming and difficult for many businesses, but it also increases your ultimate expenses because you're paying interest on the money you borrowed, and it reduces the bottom line value of your firm.

In addition, loans also require collateral, which can be limited by your hard assets. Construction receivables factoring is not a loan, so there is no debt to repay. Therefore, your balance sheet is more attractive and your financial position is strengthened.

An example of how the construction factoring process works:

A subcontractor receives an advance from the construction factor equivalent to 70% of an invoice that is for $100,000 (with the balance due to the subcontractor once the invoice has been paid). Sometimes this $70,000 (70% of the $100,000 invoice) can be directly wired to the subcontractor's bank account.

The construction factor's fee for factoring this $100,000 invoice for one month is $3,000. Once the invoice has been paid by the subcontractor's customer, the subcontractor would receive the balance of the money from the construction factoring company, in this case $27,000 which is equal to the $30,000 balance minus the $3,000 monthly fee.

Please note that these figures are strictly hypothetical and you would need to contact a construction receivables factoring company direct to find out what their factoring rates are.