A Financing Alternative for Construction Subcontractors

A Financing Alternative for Construction Subcontractors

Trying to get business financing for a construction subcontracting business is extremely challenging and will remain very difficult for the foreseeable future. Most experts predict that it will take years for the industry to regain a stable footing in the economy. And until that happens, most institutions will be very reluctant to provide business loans to subcontractors.

Although the situation may look dire for some, there are many construction subcontractors that are doing very well in this environment. And they span the industry from cell tower construction, to demolition, to carpenters, to HVAC companies. These companies are doing well but cannot get the business financing they need simply because they are in an industry that is currently considered risky by lenders.

Most subcontractors look for business financing because they have cash flow problems that originate because they get paid in 30 to 60 days after invoicing. Basically they deliver the work, send an invoice and wait to get paid. Unfortunately, few have the capital to wait. They needs fund to pay employees, office expenses and suppliers.

One alternative to solve this problem is to use construction factoring. Construction factoring provides an advance on slow paying invoices, providing the cash flow a company needs to meet expenses while waiting for their invoices to get paid. The transaction is fairly simple, a factoring company advances you a portion of your invoice - about 75% as a first payment. Once your client actually pays the invoice, the transaction is settled and you get the reminder second payment of 25% (less the factoring fee).

One advantage of construction factoring over a conventional business loan is its flexibility. The factoring line is not fixed but rather is based on your invoices. It grows with your sales. Furthermore, most factoring companies look at the credit of your GC (or commercial customer) as one of their more important funding criteria. This makes construction subcontractor factoring an ideal solution for small and medium sized companies whose biggest assets are solid clients.

Factoring financing is an effective solution for companies whose biggest challenge is that they can't wait 30 to 60 days to get paid by clients.

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