Construction Loans & Financing

Factoring is a solution that many businesses have come to appreciate, especially when the business is struggling or when clients are slow to make their payments. In order to enjoy the benefits of factoring, a business sells its invoices (accounts receivable) to a third party. That party is known as the factor. This exchange is made so that the business can get money quickly, avoiding the delay of a month or two that waiting for customer payments would require. Factoring is one form of the nontraditional construction loans that make it easier for a construction company to maintain operation even during the slower months of the year.

In fact, factoring is more a method of construction financing than a loan. Other business lines of credit could also be used to support the company, and those lines of credit would fall under the loan category.

There are some strong reasons to use factoring as a method of financing rather than other types of construction loans. For instance, the quick boost to the amount of cash coming into the business is one of the most common reasons that companies choose this method. Sometimes, the time between negotiating the factoring arrangement and money in the bank is just 24 hours. Some of the other reasons that businesses choose factoring are the amount of customization in terms, the fact that this type of financing does not show up as a debt, the convenience of terms of factoring not being based on the business’ own credit history, and the lack of limits to the amount of financing available through factoring.

How does factoring work?

The construction team completes a project for their client. Once that work is finished, the invoice for the work is sent to a factor. The factoring company then pays the construction company based on a portion of that invoice. The responsibility to collect payment from the client is now on the shoulders of the factor. When the client pays the factor, the rest of the invoice amount is paid to the construction business, minus an agreed upon fee.

Just about anyone working in the construction business understands that the industry is often at the mercy of things out of their control. When business is slow, that may mean the lack of funds for months at a time. In order for a construction company to weather the slump, factoring and other lines of credit may be the best answer.

Traditional construction loans may be difficult to come by and might not provide enough funds for the duration of the slow months. However, factoring and similar lines of credit can often allow the business to fulfill financial requirements until things turn around.