Invoice Factoring in Construction ‐ How it Works
Cashflow is a pain point in the construction industry. Invoice factoring can help construction companies facilitate better cash flow and business practices.
What is Construction Invoice Factoring?
Invoice factoring is a method where a construction company's outstanding receivables are given a cash
advance. The cash advance will not affect the overall funding available. The construction business will
still have access to funding for outstanding invoices after the request for invoice factoring is granted.
In doing so, companies can mitigate cash flow problems through invoice factoring. Invoice factoring ensures construction companies are paid more quickly, instead of waiting on client claims or payments on invoices after a phase of work. By utilizing factoring invoices, construction companies can receive payment for their invoices anywhere from 20 to 40 days sooner than they would without invoice factoring.
There are two methodologies that can for invoice factoring: spot factoring and contract factoring.
Spot factoring is most often used for "one-off" occurrences. Spot factoring is used to render money
owed on one specific invoice. Spot factoring is most often used in situations where a company does not
have regular cash flow issues but has faced one project that has been detrimental financially.
Spot factoring can get the money owed back on a single invoice without waiting for claims. Spot factoring is looked at as a one-time fix to get the company out of a problematic position.
Contract factoring offers more consistent cash flow. With contract factoring, funding is provided for
every milestone in a project.
The construction factoring company's rate will decrease as the invoices related to the project increase. When this method is used over the entire timeline of a project, it guarantees consistent and reliable cash flow during the duration of the project.
Once a factoring invoice is sent for a progress-based payment, construction companies can often receive that money ASAP. Contract factoring is a reliable and simple way to ensure consistent money flow.
Pros and Cons of Construction Invoice Factoring
Contract invoicing is an attractive option for many constructions and contracting companies, as it
produces more reliable cash flow in an industry that typically has issues with that
There are many benefits of invoice factoring, such as:
* No collateral needed.
* Quick and easy cash advance.
* Practical option for long‐term projects.
* Less payment collections made.
* No credit check or particular credit score is needed.
However, there are a few potential drawbacks to consider. Invoice factoring may not be suitable for every company or project.
A few drawbacks of invoice factoring could be:
* Construction companies must pay a service to handle their invoice factoring. These services are sometimes expensive and may take away from the bottom line.
* Construction invoice factoring is only accessible for completed projects, not for upfront costs on new projects.
* Construction invoice factoring companies can be particular about whom they work with. Less reputable construction companies may have a harder time finding a construction invoice factoring company.
In short, invoice factoring is great for companies who have cash flow problems, low or no credit, and
don't have any collateral to offer for funding. Invoice factoring helps construction companies get their
payments sooner, so they can bid on new jobs. Always do your research and pick a reputable
construction invoice factoring service to work with. Then, you can enjoy the freedom of greater cash
flow and flexibility
Use this article to make the best decision based on the size of your company and the volume of work. When it comes to all things construction payment, Nationwide Notice is there for you. We assist companies with their construction payment, as well as change order forms and lien releases. You can find all of the services Nationwide Notice provides here to learn more. Or you can check out this page to see what sets us apart.