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The Basics of Invoice Factoring in Construction

Everyone in construction knows just how tight cash flow can be. Sometimes, payments come in slowly, which makes it hard to sustain or grow the business. Thankfully, there are legal options to help, such as retainage and prompt payment laws.

However, there are other options you can make use of. Construction invoice factoring is one of them and you should be aware of it. While it might seem daunting at first, the basics are simpler than you might expect.

What Is Construction Factoring?

With construction factoring, a subcontractor can borrow based on their receivables. Factoring is a method for a business to get a cash advance on its invoices and is common in the construction world.

When you factor in a construction invoice, the company assigns the invoice to a specific factoring company. In return, the factoring company provides the construction business with immediate cash.

How Are Construction Invoices Factored?

To make use of construction invoice factoring, you must work with a factoring company that will do the factoring and provide you with cash. In many cases, the factoring business will agree to pay around 70 to 80% of the invoice value to the subcontractor. The benefit is that the payment is given long before it would otherwise have been received.

At this point, the factoring company must ensure the invoice is paid. After they are given payment for the subcontractor's work, they pay the remaining 20 to 30% minus the fee they levy for providing the service.

The Two Types of Invoice Factoring

The two main types of construction invoice factoring are contract factoring and spot factoring.

Contract Factoring

In this type of factoring, cash is given for every progress payment. The rate charged by the factoring company will go down if there are many invoices involved. When used over the life of a full contract, factoring can provide a steady cash flow throughout the job. Each time the invoice for progress goes out, the construction business gets most of the cash for earlier dates.

Spot Factoring

Spot factoring is a single payment option. A construction business will factor a certain invoice to get money when it is needed. Spot factoring can be a good choice if a business typically has enough cash flow but something comes up that causes a financial problem. It's often more expensive to do spot factoring, but it can get a company out of a serious financial situation.

Why Choose Invoice Factoring?

Construction payments often come in quite slowly. Using factoring lets construction companies get payment days, weeks, or months earlier than expected. In addition, the factoring business handles ensuring the full payment is made, while the construction family loses only the amount of a small fee.

Nationwide Notice, Inc. Can Help With Your Construction Business Needs

Nationwide Notice, Inc. offers assistance to construction businesses of all sizes. 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, Inc. 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, Inc. provides here to learn more. Or you can check out this page to see what sets us apart.

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