Construction Invoice Financing & Contractor Loans Funding

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YOUR COMPANY IS LOOKING FOR  CONSTRUCTION INVOICE FINANCE!

CONSTRUCTION FACTORING  COMPANIES FOR SUB-CONTRACTORS

You've arrived at the right address! Welcome to 7 Park Avenue Financial

Financing & Cash flow are the  biggest issues facing business today

ARE YOU UNAWARE OR   DISSATISFIED WITH YOUR CURRENT  BUSINESS  FINANCING OPTIONS?

CALL NOW -  Let's talk or arrange a meeting to discuss your needs

7 Park Avenue Financial
South Sheridan Executive Centre
2910 South Sheridan Way
Oakville, Ontario
L6J 7J8

Direct Line = 416 319 5769

Email = sprokop@7parkavenuefinancial.com

 

What Is Construction Invoice Factoring - Your Guide To Contractor Loan And Construction Invoice Financing

 

Construction invoice factoring contractor loans is all about the cash flow of your receivables outstanding from clients. This allows your business to fund payroll and operations successfully and consider working capital for growth projects and new clients while avoiding cash flow problems.

 

THE NEED FOR FUNDING IN CONSTRUCTION CREDIT

 

The construction industry presents unique challenges that can significantly impact a company's cash flow and financial stability.

 

One of these challenges is the complexity of managing subcontractor payments to improve cash flow, which often involves intricate billing structures and timing around invoice value. Additionally, construction firms must contend with the potential threat of mechanics liens.

 

These legal claims can be placed against a property when contractors or subcontractors are not paid promptly, causing disruptions in project timelines and financial setbacks. Furthermore, the industry is subject to various government regulations and compliance requirements that can further complicate financial operations.

 

Construction invoice factoring can be a valuable tool for addressing these challenges by providing immediate cash flow to navigate the intricacies of the construction business while allowing companies to focus on delivering projects efficiently and profitably.

 

Contractions and extraction companies, for example, need steady funds. The challenge is that traditional financing can rarely satisfy the needs of small construction companies due to their size and risk perception around their industry. An excellent example of that is contractor holdbacks and progress billings typically associated with the industry, with those holdbacks, of course, being government law! Naturally, the world done by your firm is also subject to mechanics liens, further complicating the matter.

 

The challenge for a sub-contractor and factoring for construction subcontractors is to ensure you have an experienced Canadian business financing advisor and a construction factoring company who can help you fund construction receivables.

 

Construction companies, large and small, play a key role in the Canadian economy. The industry's ability to secure cash flow and business financing to complete current jobs is key to its long-term success.

 

HOW THE RIGHT FACTORING COMPANY FINANCES CONSTRUCTION RECEIVABLES

 

The effective use of a factor/receivable type construction invoice finance allows a company to eliminate the wait time that otherwise might delay work if cash flow is not secure. Proper invoicing and financing assistance via a factoring agreement from a financing company allow the company to project cash flow needs for current and future projects. The ups and downs of cash inflows' timing is a key challenge to any firm in construction - cash flow might be plentiful today and less so tomorrow.

 

 

 

WHY CONSTRUCTION RECEIVABLE FINANCING WORKS

 

Those cash flow fluctuations, significant in nature, are why construction factoring and factoring construction receivables via construction invoice factoring companies work well for both startups and established firms.  It's safe to say the clients of construction companies big and small would prefer to work with companies such as yours, knowing your firm can meet its obligations.

 

TRADITIONAL FINANCING IS NOT ALWAYS AVAILABLE.

 

The whole issue of subcontractor factoring / factoring construction invoices,  and the type and nature of construction invoices vis a vis work completed, progress billing draws, application for payment, etc., make traditional financing challenging and seemingly inaccessible for many firms trying to get paid promptly while avoiding negative cash flow via a conventional bank loan.

 

  

BANK REQUIREMENTS FOR A/R CONSTRUCTION FUNDING  

 

That perceived risk, real or otherwise, forces many finance firms, banks, etc., to ask for additional collateral and the proverbial ' personal guarantee around a construction company's financing. Sometimes, ' credit insurance ' is one answer to the contractor finance challenge. Different types of firms within the construction industry have needs that vary as they assess the construction funding needed for larger jobs in their construction industry.

 

  

CONSTRUCTION COMPANIES TYPICALLY ELIGIBLE FOR  SALES FINANCING

 

  

Typical contractors eligible for invoice and receivable financing include electrical, floor, roofing, scaffolding, drywall, drainage, flooring, tiling, brick, and carpentry firms.

 

HOW INVOICE FACTORING WORKS?

 

Putting an a/r factoring facility in place for a new project for your business allows your firm to be paid promptly, and for a construction company, that cash advance is critical cash flow. Knowing you have guaranteed cash flow will enable you to complete current projects and consider the next job. Due to the seasonality and timing of cash inflows in the construction business, knowing you have predictable cash flow is the key to success. With good profit margins, businesses can lower their financing costs around factoring company charges.

 

EXAMPLE:

 

Let's consider a factoring cost analysis with an invoice value of $50,000 and an advance of 80%:

You choose a factoring company that provides an advance of 80% of the invoice value, totalling $40,000.

You will receive the $40,000 immediately  -The agreement clearly states a factoring rate of 2% over 30 days as an example

As your client makes the payment within the 30-day timeframe, the factoring company charges a 2% factoring fee of $1,000.

The balance of the invoice, i.e. the 20% holdback, is paid when the client pays the invoice.

 

A construction factoring company typically offers two types of construction invoice factoring:

 

1. Spot Factoring: This option comes into play when a company requires immediate cash and wishes to factor in a single invoice. Spot factoring is suitable for businesses facing a specific cash flow need due to an isolated invoice issue. It's worth noting that spot factoring can be pricier compared to contract factoring.

2. Contract Factoring: Similar to spot factoring, contract factoring involves a more extensive range of invoices. In this arrangement, the factoring company provides cash for each progress payment. Due to the higher volume of invoices involved, contract factoring often comes with more favorable rates.

 

 

IS CONSTRUCTION INVOICE FINANCING A GOOD IDEA?

 

Suppose your firm is in constant need of cash. In that case, you typically invest in accounts receivable that force you to wait for client payment - that's why construction invoice factoring works. By generating immediate cash as soon as you invoice a client, you have eliminated the challenge of cash inflows. Therefore, this type of financing allows you to complete jobs and, importantly, consider positions that might be out of reach from a size perspective. Your firm can't wait for 90 days to collect payment.

 

IS PURCHASE ORDER FINANCING A SOLUTION?

 

At 7 Park Avenue Financial, we always meet clients who require financing to take on larger contracts but need the financing to do so. Sometimes, a PURCHASE ORDER FINANCING facility makes sense, allowing your suppliers to be paid directly for your materials.  Any contractor or construction firm's general needs are typically general corporate functions such as payroll, supplier purchases, and ensuring your fixed costs and loan payments are current.

 

WHAT STAGE IS YOUR BUSINESS IN?

The construction industry is varied - your firm might be in its early stages or, as we have discussed, lacking financing to grow and take on larger clients. The Canadian chartered banks have typically 'underserved ' these firms, leaving them ' debunked. The financial term ' concentration risk ' must also be considered, as some companies tend to have only one client or have most of their work at any time in one client. Commercial lenders view this as 'a concentration risk. '

 

 

HOW DOES CONSTRUCTION FACTORING  WORK? 

 

Certain vital issues must be addressed to make construction invoice factoring and financing for construction subcontracts work. Typically, your invoice will have an advance made to your firm in the 75-80% range. The excellent news with construction finance factoring is that you are not obligated to finance all your receivables, although certainly, you can if you choose.

 

Your clients must pay the lender the full invoice amount, and your business still gets that additional balance owing to lower financing costs.

 

Contractors, sub-contractors, and small construction companies should demonstrate decent gross margins on their pricing to clients to absorb the financing costs.

 

Many firms are under the mistaken impression that this type of financing is a loan, thereby bringing debt to their balance sheet. That is not the case!  These are not contractor loans. You are ' cash flowing ' an asset on your balance sheet already.

 

When considering financing options for their construction business, companies often weigh the advantages of construction invoice factoring against various alternatives.

 

While construction invoice factoring offers quick access to cash based on outstanding invoices, comparing it to traditional financing sources like bank loans, lines of credit, and equity financing is essential. Bank loans and credit lines typically involve a lengthy approval process and stringent credit requirements, making them less accessible, especially for smaller construction firms.

 

Equity financing may require giving up ownership stakes in the company. Factoring, on the other hand, emphasizes the creditworthiness of clients rather than the company itself, making it a viable option for those with less-than-stellar credit or those seeking a faster and more flexible funding solution.

 

Choosing the right financing option depends on a construction company's specific needs and financial situation, making a thorough comparison crucial in making an informed decision.

 

 CONCLUSION  

 

At 7 Park Avenue Financial, we are focused on ensuring construction businesses like yours can release cash flow from their construction projects. We focus on providing you with the capital injections you need on a short and long-term basis. That might also be in acquiring assets to run your construction business. Regarding your unpaid invoices, the right factoring company is job #1 at 7 Park Avenue Financial.

 

The ability to have a partner that understands your business and can react quickly to your invoice discounting. We will consider how you do your work and bill clients, where your clients are located, your specific needs, and what type of sales growth you are currently experiencing and projecting. If necessary, we'll prepare your company's business plan and cash flow projections.

Knowing your estimated funding needs around the seasonality of your work and understanding when you might need additional ' bulge financing ' is the type of financing partner you should be focused on. Sometimes, your work might involve government contracts with unusual terms around completion, etc.

 

At 7 Park Avenue Financial, we will ensure you get the maximum available advance on all your invoicing - in any business, knowing who to work with on business financing is key to your larger jobs. Successful financing needs /Seek out and speak to a trusted, credible and experienced Canadian business financing advisor who will assist you with your contractor invoice financing and other funding needs.

 

FAQ

 

What is construction invoice factoring?

Construction invoice factoring is a financial service where construction companies sell their outstanding invoices or receivables to a factoring company at a discount. In return, the construction company receives immediate cash, which can be used to cover expenses and finance ongoing operations. The factoring company then assumes responsibility for collecting the full invoice amount from the client.

Why would a construction company consider invoice factoring instead of taking a traditional loan?

There are several reasons:

    Speed: Factoring invoices can provide immediate liquidity, often within 24-48 hours, while traditional bank loans might take days or weeks to get approved.

    Credit Requirements: Factoring companies are typically more interested in the creditworthiness of the construction company’s clients than the company itself. This makes factoring a viable option for companies with less-than-stellar credit or relatively new ones.

    Flexibility: Invoice factoring doesn’t create debt on the construction company's balance sheet. The company is simply receiving an advance on money it's already earned.

    Cash Flow Management: Invoice factoring can bridge the gap between completing a project and receiving payment, ensuring uninterrupted operations for businesses with long payment cycles.

Are there any potential downsides or risks associated with construction company factoring?

Yes, there are potential drawbacks to consider:

    Cost: Factoring usually comes at a higher cost than traditional financing. The fees charged by the factoring company might erode profit margins.
    Dependency: Over-reliance on factoring can lead to a cycle where the company always needs advances to cover expenses rather than improving its cash flow management.
    Customer Relations: If the factoring company uses aggressive collection tactics, it might strain the construction company’s relationships with its clients.

How does the factoring company make money in this process?

Factoring companies earn money by charging fees or a percentage of the invoice. When a construction company sells its invoice to a factoring company, it typically receives a significant portion (e.g., 80-90%) of the invoice amount upfront. The remainder, minus the factoring fee, is paid to the construction company once the factoring company fully collects the invoice. The difference between the advanced and collected amounts, minus the reserved amount, is the profit for the factoring company.

Is construction invoice factoring suitable for all types of construction companies?

 While invoice factoring can benefit many construction companies, especially those experiencing cash flow issues or rapid growth, it's not a one-size-fits-all solution. Factors to consider include the company's profit margins, the creditworthiness of its clients, its typical payment terms, and its overall financial health. Before diving into factoring, a company should evaluate all financing options, consult with financial advisors, and carefully review any agreement with a factoring company.