Many companies in the construction industry need more cash flow in order to help their business become more stable. The problem is that banks aren’t exactly in the mood to lend them money these days. Besides, the entire loan process when dealing is interminable and complicated. That’s where construction accounts receivable financing comes in. You use your accounts receivable and you get an advance of up to 90% right away. Then when the account is paid in full by your customer, you get the rest of the money after the fee paid to the factor has been deducted.
There’s still a bit of confusion regarding construction accounts receivable financing, so let’s try to dispel the myths.
- You need the help of a factoring broker. Loan and factoring brokers can help, but in most cases they represent the lenders. If you need help so that you can choose the best factor for your construction business, what you need is actually a factoring consultant.
- With a consultant, you have an expert that acts on your behalf and not on the behalf of the factor. You then have someone who can give you great advice when you negotiate the terms of the financing agreement.
- You have to give the factor all of your accounts receivable. This is completely untrue. When you use your accounts receivable to get the financing you need, total control is still in your hands. The factor doesn’t get to pick and choose which accounts receivables to factor. They can, however, pick and choose from the accounts receivable which you choose to submit. The factor assesses the creditworthiness of the business of the debtor.
- The factor does file a UCC lien on your company’s accounts receivable. This is done so in the event that the debtor doesn’t pay, they have a way of getting back their money. It’s very similar to how a bank will tag all your assets with a blanket lien so that they can recover their money if you default on your loan payments.
- You don’t have to pay back the advance if the customer doesn’t pay. It all depends on the agreement you have with your factor, but in virtually all cases this is not true. If the customer doesn’t pay, then you’re held liable for the advance.
- There is such a thing as non-recourse factoring, in which factors will have to shoulder the loss should the customer become unable to pay because of bankruptcy. But this is the only exception. If they don’t pay because of a dispute with you, the factor isn’t involved and you have to return the advance. In some cases, that means giving another account receivable and using that money to pay off the advance.
- Availing construction accounts receivable financing is a sign that your company is having financial problems. Many construction firms actually prefer this form of financing because it can actually be very helpful. After all, the factor takes over the collection, and they help assess the creditworthiness of potential customers. What’s more, the lack of cash flow can kill the business, and factoring is a way for you to avoid that.