Banks nowadays are getting a bit too anxious about who they lend money to. They tend to be hesitant about lending to various small business enterprises, and that includes construction companies. According to the US Small Business Administration, at least 74% of small business applications are turned down, and that may be a conservative estimate. The real figure may be as high as 90%. When a construction company needs a quick business loan to cover an emergency, banks loan procedures are generally too slow anyway, and that’s where factoring loans for construction companies come in.
How Factoring Works
In a factoring agreement, the construction company exchanges accounts receivable for immediate cash and the factoring company even takes the responsibility of collecting the debt from their clients. This frees the construction company from having to hire personnel to chase invoices, and its efforts can then be concentrated on the actual construction work. In a non-recourse factoring, the factoring company even takes the risk of non-payment—the construction company is not liable if their client refuses to pay.
Let’s take a situation in which a construction company has two weeks to come up with a payroll of $100,000, but the company doesn’t have the cash to cover it in time. However, the construction company does have a $200,000 invoice that will be paid up in a month’s time. For the sake of this example, let’s say that the construction company approached a factoring service that gives 75% upfront and charges a rate of 5% per month. So, with those terms, the construction company can then hand over the invoice to the factor so that it can get $150,000 in time to cover the payroll. Once the factor receives the payment from the client, the construction company then gets $45,000, while the factor takes $5,000.
Remember though that different factoring companies have varying rates and fees.
The Advantages of Factoring for Construction Companies
Factoring loans for construction companies offer a lot of benefits, such as:
1. The construction company saves money because they don’t need to hire personnel to collect money from their clients. This gives them the opportunity to focus all their attention and energy into actual construction work.
2. The infusion of cash is almost immediate. The approval rates for factoring loans are extremely high compared to traditional bank loans, and the procedure is short and efficient. The quick transfer of funds can be used for all manners of time-sensitive situations, from covering payroll or buying much needed supplies.
3. The interest rate for factoring is also much more reasonable than the rates demanded by credit card companies. Credit card companies impose high interest rates all the time and construction companies may also have to pay high late fees when missing a payment. In contrast, the percentage the factor receives from the invoices is fixed.
Essentially, construction companies that use credit cards for financing can face a lot of unforeseen problems which may only worsen their financial situation. With factoring, however, many problems that require a quick infusion of cash are addressed quickly and safely.