Receivables Funding

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CONSTRUCTION FACTORING

One of the most common challenges a business in the construction field faces is maintaining cash flow. Yet most businesses are subject to progress payments, meaning they generally do not begin to receive payments until 30, 60 or even 90 days into the project. The answer to the inevitable cash crunch is factoring, which is quickly becoming the alternative financing method of choice throughout the construction industry.

What is Factoring?

Factoring means selling your accounts receivable-- whether they be invoices, progress billings, requisitions, or AIA's-- to a finance company (known as a factor) for a discount. The factor actually buys one or more of the business's invoices, advancing cash to the business-- typically, 70%. Once the invoice or invoices are paid, the factor will rebate the balance of the invoice after deducting its fee.

Who Can Benefit from Factoring?

Contractors, subcontractors, suppliers, and every other small to medium-size construction-related business can benefit from factoring.

How Can the "Quick Cash" Available through Factoring Be Used?

Construction-related businesses can use the funds available to them through factoring to pay their workers, make tax, workers' comp, union dues, and insurance payments... and buy the materials necessary to complete their jobs. It can help a business that is facing a cash flow survive-- and it can help a business grow by providing the funds needed to go after new jobs and new markets. The recent rebuilding following the devastation of Hurrican Katrina is the perfect example.

Highrise Construction picture

What Are the Advantages of Factoring?

* Speed.
A business that finds itself in a cash crunch may receive its funding in as little as 24 hours.

* No Monthly Payments.
Since the business does not actually borrow any money, it makes no monthly payments.

* Continuous Cash Flow.
Factoring provides a business with cash whenever it is needed.

* Relies on the Financial Strength of Customers.
Factoring provides funding based on the financial strength of a business's customers, not
on the business's own financial strength.

* Stimulating Growth Opportunities.
   Factoring offers businesses the chance to grow by providing them with access to funds they
   can use to bid on other jobs, get new customers, go into new markets, and increase their
   scope.

* Accessible to Unbankable Businesses.
Any business with accounts receivable can qualify for funding through factoring.

WHEN YOU BORROW:

It limits your flexibility.

A lender will secure assets equal to a minimum of 3 times the amount of the loan.

You can not secure additional funds without renegotiating the loan.

You must meet monthly payment obligations.

There is a loan liability on your balance sheet.

WHEN YOU FACTOR:

You don't borrow money.

You make no monthly payments.

You receive funds in 24 hours or less.

You control your cash flow by determing how much you need.

You increase the availability of immediate cash which can enable you to bid on more new jobs and earn additional supplier discounts.

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In many situations, Receivable Funding is more appropriate than bank financing, because:

Is based only on the accounts receivable. A client's ability to raise cash by Receivables Funding is based on the total accounts receivable, rather than on traditional measures of financial strength and stability.

Provides continuing cash flow without the requirement of periodic payments or interim payoffs. New sales continuously create new power to obtain cash, and the business does not have to deal with renewal of loans or worry about maturity dates.

Gives a business increased access to cash as sales and receivables increase. There is no ceiling beyond which the factor must stop providing cash. The more sales a business makes, the more cash it can draw. The factor does not concentrate on the business debt/equity ratio to provide funds, as banks do.

Offers a dependable, continuing source of cash without the necessity of making separate loan applications.

Avoids the necessity of obtaining funds from venture capitalists, who receive an interest in the business and generally have a say in how the business is run.

Saves the business owner precious time waiting for a loan board to grant or deny his or her loan. Loan boards' decisions are influenced by many considerations, and the outcome is often unpredictable. With factoring, periodic delays and negotiations are eliminated, allowing the business owner time to do what he or she does best – run the business.

What are the benefits of Receivables Funding?

Receivables funding stimulates cash flow.

Receivables funding relies on the strength of a business's customers.

Receivables funding is accessible.

Receivables funding gets quick results.

Receivables funding is flexible.