Myths about Construction Accounts Receivable Financing

Myths about Construction Accounts Receivable Financing
Myths about Construction Accounts Receivable Financing

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.

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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.
  6. 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.
  7. 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.

Setting Accounts Receivable Factoring Rates for Staffing Companies

It’s not a secret that staffing companies nowadays have to find ways to deal with a new type of job market. For the most part though, things are looking up. Hiring is on the rise in many sectors, including oil and gas, education, IT, legal, and financial services. The recession and the job cuts are no longer apparent today and a lot of employers these days prefer to hire consultants through a staffing company.

But the business model for staffing companies usually results in a rather distressing cash flow situation. Staffing companies pay employees on a weekly basis. But business clients usually pay after 30 days, or even longer. Not having sufficient money for payroll can happen because of this.

This is where accounts receivable factoring comes to the rescue. The factor takes your accounts receivable and in return they advance you a huge chunk of the value of your AR. Then when the client pays the invoice in full, you get the rest of the money minus the fees charged by the factoring company.

There are several details about accounts receivable factoring rates you need to consider:

  • The percentage of the advance. Some factors are known to advance as much as 90% of the value of the invoice, and sometimes they boast that the value of the advance is more than that. Usually, it’s in the 70% to 80% range. It all depends on a number of things, such as the invoice due date, the credit and trustworthiness of the customer and their tendency to pay on time, the value of the invoice, and whether the factor has a long standing business relationship with your company.
  • The factoring cost. The accounts receivable factoring rates for staffing companies are usually expressed as a percentage of the value of the invoice, just as the interest rate is a percentage of a loan. It can be as low as 1%, or it can be two points over the prime rate. Again, all this depends on the factor and how you two negotiate your factoring agreement.
  • The factoring fee. This is another fee, but usually this is a flat fee for every single factored invoice. This is why you may want to factor your larger invoices so that you keep the factoring fee to a minimum. A one-million dollar invoice is better than paying the factoring fees of a thousand accounts receivables worth a thousand dollars each.
  • Just make sure though, that every fee you pay is specified in your agreement. And you need to make sure that the accounts receivable factoring rates for staffing companies are reasonable. Paying 20% for a loan is one thing. Paying 20% for money you get only a month in advance is another thing entirely. You have to calculate the APR so you understand how much the cash advance is costing your business. With this information, you can properly assess whether the advantages of accounts receivable factoring are worth what you pay for.

The Truth About 24 Hr Business Funding

Have you ever tried borrowing money for your small business? If so, then you don’t need anybody to tell you what a harrowing experience it can be.

If you take advantage of 24 hr business funding, expect that you’ll pay for the privilege of getting your loan approved quickly. At best, these loans will charge you anywhere from 20% to almost 40% interest on an annual basis.
If you take advantage of 24 hr business funding, expect that you’ll pay for the privilege of getting your loan approved quickly. At best, these loans will charge you anywhere from 20% to almost 40% interest on an annual basis.

It’s a very time consuming process. Finding a suitable lender among a horde of banks and loan providers is hard enough, and usually there’s a ton of paperwork involved. Your company and your personal finances will be checked thoroughly, and between that investigation and red tape, it will take an eternity to complete the process.

But now you have another option: 24 hr business funding.

What Is It?

24 hr business funding can mean lot of things, so when you see a website offering this kind of service, you have to make sure that you and the lender are on the same page. A 24 hr business funding could mean that you can apply for a loan outside of normal business hours, for example.

Or it can also mean that you can get approval for your loan application in just 24 hours. But your money will come in a week or two.

But of course there are also those that will give you the money you need in just 24 hours, and this is obviously the kind of 24 hr business funding you want to engage in.

How Do You Qualify?

If approval of the loan itself comes in 24 hours, then usually the finance company will need to check obvious signs that your business is in good shape to pay for the loan. They won’t check your business model or ask about how you are trying to improve your credit rating. They need hard data, such as about cash flow, revenue, and steady business checking account balances.

Some of these companies can be strict with their requirements. Keep in mind that computer programs usually decide whether you qualify for a loan and for how much. And you can’t really negotiate with a computer.

What are the Interest Rates?

Here is where it gets tricky. If you are tempted to use a loan broker to help you find the best deal, make sure that you’re not getting unfairly (although legally) overcharged. It’s not rare for a loan broker to add another 15% interest for themselves on top of the 30% the loan provider wants. But the most respectable brokers may pocket fees of 1% to 3%, which are paid by the lenders and not the borrowers.

If you take advantage of 24 hr business funding, expect that you’ll pay for the privilege of getting your loan approved quickly. At best, these loans will charge you anywhere from 20% to almost 40% interest on an annual basis.

You need to make sure that you understand the true APR you’re paying. You may end up paying more than an annual interest rate of 100%, especially if you don’t read the fine print. That’s why your best bet is to find a lender who is up front about the costs of the loan.

24 hr business funding can do a lot for your business. Just make sure you get in with your eyes wide open.

The Key Aspects in Manufacturing Asset Based Lending

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Asset based lending is a popular way for businesses to get the funding they need. Manufacturing asset based lending is common, and it represents a viable source of funding when banks are unable to offer an unsecured loan or line of credit.

Asset based lending is now a $200 billion market. Manufacturing asset based lending leads the pack, as it accounts for 31% of this market. Wholesalers follow at 28%, and then the retailers come next at 21%. This form of financing is not reserved for large companies either, as 71% of these companies have annual revenue of less than $50 million.

Two Types of Asset Based Lending

In general, asset based lending falls into two different types:

  1. Term loans. This is when you get the money you need, and then you have to pay on schedule. The amount is fixed for a specified period of time. Once you start paying on a term loan, the amounts you pay can’t be borrowed again. Usually, you secure a term loan with fixed assets such as your equipment or property. You then use the funds to finance your long-term needs and to acquire additional equipment.
  2. Revolving credit. With this type of finance, the amount you owe can fluctuate even on a daily basis. You can borrow money up to a specified amount, start to repay the money, and then borrow again as the need arises. Generally, you secure a revolving line of credit with your current assets. These are usually your inventory and your accounts receivable. Most of the time, the money will be used for funding working capital needs.

Explaining the Revolving Credit Model

This revolving credit is often an excellent way to maximize the availability of your working capital. While term loans are familiar to many, revolving credit may need to be explained.

But it’s actually simple. You offer your receivable and/or your inventory as collateral for the line of credit. Your credit limit will be determined by the value of the collateral. Once your receivables are paid, the cash is then forwarded to the lender as payment for the outstanding debt so that the balance is reduced. If you need more money, you just ask and you’ll get what you ask for as long as you don’t go over the credit limit. It’s like using a credit card.

The lender is in charge of the revolving line of credit, and also manages the collateral. This is to ensure that you get the optimum amount of credit anytime you need it. Your customers are not generally informed of this arrangement, so you continue to service your receivables and collect the payments. Your customers don’t have to know about this funding option.

Advantages of Asset Based Loans

In general, the main advantage here is that you get the additional funding you need quickly. Getting an unsecured loan is much more difficult. The revolving line of credit can provide a cushion for your working capital, and you don’t have to wait for the inventory to be sold and for the receivables to be paid in cash. With these term loans, you can then make long term plans for your company’s growth.

What is Manufacturer Purchase Order Finance?

US manufacturers constantly need working capital. They go to banks and ask for a loan or a line of credit, but often such efforts can be frustrating and futile. Even factoring, in which invoices are leveraged for funding, may not work when there are too few invoices. But manufacturer purchase order finance may just be the solution.

The Problem with the Manufacturing Industry

Manufacturing today, especially in the US, is still in the doldrums. The industry employment rate fell by 10% because of the recession, and its current employment is just half of what it was in 1979. While there are signs of new life brought about by exciting new technologies such as 3D printing, these advances just add to the additional expenditures. US manufacturers today are still using equipment that’s slowly becoming old and obsolete.

For manufacturers, the question of expenditures is crucial. There is payroll to meet, along with other operation expenses. The problem is compounded by the fact that their clients pay in 30 or 60 days. Often this means that a manufacturer may have trouble maintaining an adequate cash reserve for the purchase of supplies when a new project or purchase order comes in. It may even cause a manufacturer to refuse a purchase order that can bring in much needed revenue.

And that’s where manufacturer purchase order finance comes in.

How Purchase Order Finance Works

In this scenario, the manufacturer can take a new order even if they don’t have the money to pay for the supplies needed to complete it.

Once the finance company approves of your request for purchase order financing, they may reserve a percentage of the value of the order (such as 50 to 70%) for your working capital use. Your finance company may pay the suppliers themselves, or they may open a line of credit for you to use. Once your customer pays lender the amount they owe in full after you have delivered the order, you then get the rest of the payment owed to you, after the finance company has deducted its fees.

Requirements

The manufacturer may not need to have the best credit ratings and there’s no need for collateral, but the finance company will need to evaluate a few things first. The finance company will make sure that:

  1. You have enough of a profit margin on the order to make the financing worthwhile. Some finance companies, for example, will want to see at least 20% gross profit margins, while 30% is preferable.
  2. Your company has the ability to complete the order, according to the contract. You have to make enough products in the quality required by your client, according to the schedule specified. You need to have strong financials and you should have enough experience in the type of product requested. If you don’t have the experience, you may consider getting a sub-contractor to manufacture the product.
  3. Your customer has an excellent reputation. They should have a good history of paying on time, and the purchase order cannot be canceled.

With this type of funding, you can now accept more orders instead of turning them down.

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Financing Construction Invoices for Sub-Contractors

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Nowadays, financing construction invoices for sub-contractors is an increasingly popular option. Usually this kind of financing is used to boost a company’s working capital, and that’s because the payments and the expenses don’t match up.

Sub-contractors need to pay their workers on a weekly basis, and they need to cover overhead as well. For every project they have, they also have to cover the costs of supplies as well as the rent for equipment. But it’s very common for sub-contractors to receive an invoice instead of cash, with the payment from the general contractor or client coming in after two whole months of waiting.

How It Works

While in some cases financing construction invoices for sub-contractors means receiving a loan with the invoices as collateral, that’s not usually what happens. After all, loan applications still take too much time. Sub-contractors have to present several years of profits for lenders, and they need to have an excellent credit history. For many subcontractors, these requirements simply can’t be met especially when the sub-contractor is new to the business.

What happens is that the finance company essentially purchases the invoices. The subcontractor gets 80% of it in advance (the exact percentage may vary depending on the agreement), and that money can then be used for their needs. Meanwhile, the finance company monitors the invoices and handles the collection. Once the general contractor or the client pays in full, the factoring company deducts the fees from the payment and gives the rest to the subcontractor.

Advantages over Other Forms of Financing

With this type of financing, the sub-contractor enjoys several advantages. Perhaps the most crucial here is that the chances of getting the additional funding are much higher. That’s because the credit history of the sub-contractor is irrelevant. Processing a funding application can take just a week or two, and afterwards the money can be forwarded in a day when the invoice is received.

This is in stark contrast to dealing with banks. It’s also much better than dealing with credit card companies, which may not be able to provide the amount the subcontractor needs. What’s more, credit card companies can charge interest rates so high that they can seem almost criminal. The fees commanded by factors are much lower.

Another advantage is that the sub-contractor is spared from having to monitor the invoices and making the collections. These tasks are already part of the factor’s services. There’s no need to hire additional personnel to handle these jobs. The subcontractor can concentrate on completing the current projects and searching for new ones.

Finally, the factor also investigates the credit of potential clients. This can help the subcontractor make informed decisions regarding taking on a new client, who may or may not have a good history of making payments. And when the subcontractor does take on a new project, they have the working capital to use for supplies and rental equipment.

With financing construction invoices for sub-contractors, operations are smoother and opportunities for growth can be seized.

Construction Factoring Advantages and Disadvantages

How Easy Is It to Get Construction Working Capital Loans in Canada?
How Easy Is It to Get Construction Working Capital Loans in Canada?

Most businesses these days need additional working capital to guarantee a smooth flow of operations and to fuel their growth. This is especially true in the construction industry, where expenses can be rather exorbitant.

Since payments in this industry usually take up to three months, using revenue for working capital is often impractical. This is why factoring has become popular. But before you use it to fund your business, you should carefully consider the construction factoring advantages and disadvantages.

In factoring, you get a percentage of the value of the invoice from the factor in advance. This is usually about 80% of the value, although this can differ depending on the factor and the customer. You then receive the rest of the payment when the customer finally pays the factor, and you get the rest of your money after the fees of the factor have been taken out. This fee can be anywhere from 1.5% to 5%, again depending on the agreement.

Advantages of Construction Factoring

Construction factoring offers a lot of benefits, which is why it has become so popular.

  • Applying for the funding is easy and quick. It may take a week or two at the most to complete the process, and the likelihood of approval is very high. You don’t need excellent credit, and the invoices are used to obtain the funding. There’s no need for collateral.
  • You can finance operations and growth. This means that you can get the money you need fast enough to pay for payroll and overhead, and also pay for supplies and rental equipment needed for projects.
  • Credit investigations can reveal delinquent payers. This enables you to identify and choose clients who pay on time.
  • You don’t have to setup a payment collection department. This service is handled by the factor for the invoices you choose to factor.
  • You can decide how much money you need. You may be able decide which invoices are factored. When the advances from these invoices are sufficient for your needs, you can get the full amount from the other invoices. You can even factor just one invoice.
  • You can keep track of the invoices. Monitoring the invoices is also part of the service.
  • Once you already have a relationship with a factor, the next time you ask for a similar arrangement the process becomes much faster.

Disadvantages of Construction Factoring

There are several possible drawbacks to this approach, however.

  • Perhaps the most significant drawback is that it will cost you more than what you would pay in interest with a typical bank loan. But that’s usually irrelevant if you can’t get a bank loan in the first place. Also, plenty of people use their credit cards for additional funding, and the interest rates on those are much higher.
  • Some customers may prefer to deal with you directly. This can be a problem for the construction industry, where networking is very common. This is exacerbated if you don’t choose a finance company that’s professional in their collection approach.

When evaluating construction factoring advantages and disadvantages, it’s easy to see that the good outweighs the bad. This explains the surge in popularity of construction factoring.

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Despite Poor Business Credit, Factoring Finance Loan Applications Still OK

Factoring: A Loan That Will Not Affect Business CreditAs a small business owner, one of your responsibilities is to make sure that your personal credit is excellent. Your personal credit won’t only affect your mortgage, but it also affects your ability to get a loan from a bank. That’s actually one of the reasons why factoring is so popular. Even if you have a poor business credit, factoring finance loan applications still have a good chance of being approved.

The Difficulties of Getting a Bank Loan

It’s bad enough for you personally if your credit is in the toilet. Your ability to get a favorable mortgage is diminished, you have to pay for high interest on car loan agreements, your credit card interest rates can skyrocket, and so will your insurance premiums.

But when you have poor credit, your business suffers as well. That’s because among the many requirements that a bank will ask from you is your personal credit score. This is standard procedure for just about every bank. After all, your credit reflects your proven ability or tendency to pay loans on time. As the business owner, your personal credit will be mandatory if you ask for a business loan.

Factoring and Your Personal Credit

With factoring, you get your financing by using your accounts receivables. These invoices usually get you the payment from your clients in 30 (or even 60) days. But waiting for such a long time to get your payment can be problematic, especially when you have an immediate need for cash.

With factoring, you get the bulk of the value of the money right away. The factor then takes over collecting the payment from the client. Once your client has paid the factor in full, you get the rest of you money back minus the fees for the factor.

In this financing model, it’s easy to see why even with your poor business credit, factoring finance loan applications are still granted. That’s because your ability to pay the money that the factor advances to you is irrelevant.

What is important, however, is the credit of your customer who will pay back the money forwarded by the factor. That’s why the credit of your customers is crucial, because the factor won’t advance any money to you if they think your customer is likely to pay late or not pay at all.

Other Alternatives

You can, of course, still seek loans from other institutions which may be willing to lend you money even when the banks have turned you down. But there are problems here. One is that because of your bad credit the amount you receive may be too small because the lender doesn’t want to risk too much of their money.

The other problem is that the interest rate can be downright awful. It’s not uncommon for businesses with poor credit to pay as much as 40% in interest.

So if you have a poor credit history and you need financing, you may want to consider factoring. With this option, your credit scores don’t count. What matters is that you have customers with excellent credit.

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10 Reasons to Look for Commercial Factoring Companies

So you’re looking for additional funding for your company. It’s safe to say that you’re not alone in this situation. But even though you have lots of options now when it comes to funding, perhaps you should take a look at factoring. Commercial factoring companies may be better for you than traditional lenders.

Here are some situations when you should seriously consider dealing with commercial factoring companies:

  1. Your application for a loan or credit line has been rejected. This is pretty much one of the most common reasons for choosing factoring as a source of funding. In fact, the current popularity of commercial factoring companies was because banks started to tighten their belts when the recession began.
  2. You’ve pretty much reached the limit on your current line of credit. Getting an extension or getting a new line of credit from another bank may not be possible, and even if it is, the money may come too late for your needs.
  3. You don’t want to put any more debts on your balance sheet.
  4. You can’t pay for operating expenses or meet payroll. This inability to pay can hinder your operations, sully your company’s reputation, or even shut your company down altogether.
  5. You can’t pay your bills or your debt obligations. Not only will your reputation suffer, but this can also have a negative effect on your credit. That, in turn, can make it more difficult for you to get a loan or a line of credit from a bank.
  6. You can’t purchase materials you need to meet orders. Orders are opportunities for you to make a profit, and by not having the money you’re losing these opportunities
  7. You’re turning down clients who demand at least 30 days to pay. Again, this is limiting your profits, and perhaps also damaging the relationships you’ve formed with clients.
  8. You are a small company or your net worth is negative, but your customers have excellent credit. The size of your company or even your negative net worth is not really of concern to factors. The most important consideration is the likelihood that your customers will pay you. If your customers have great credit, then you’re a shoo-in to get your funding.
  9. You can grow your company faster or more easily if you had the funds available. Growth is crucial for a company, and for that you’ll need the capital which factoring can provide.
  10. You want to take advantage of vendor discounts. Usually, vendors may allow you to pay in 30 days too. But they may offer significant discounts if you pay earlier or even pay upfront. By getting the money in advance from your invoice, you can pay right away if the discount is larger than the fee charged by the factoring company.

Do any of these statements apply to you? If that’s the case, then you are a good candidate to apply for, and receive funding from, factoring companies.

The Many Benefits of Medical Business Receivable Funding

If you’re setting up a medical clinic, then you absolutely will need a bank loan unless you have enough capital to take care of all your expenses in the next 6 months. But because of the nature of the current health care system, more and more doctors are turning to medical business receivable funding.

With this funding option, doctors don’t have to wait for a very long time until the insurance company gives them their payments. That’s because, with medical business receivable funding, they can get a large chunk (as much as 80%) of the value of the receivable – in advance. Then when the insurance company pays the lender, the doctor gets the rest of the payment minus the fee the lender charges.

There are several reasons why receivable funding has become very popular in the health care industry:

  1. Doctors get the funding they need quickly. Banks take a very long time to approve a loan, and sometimes they may not provide a loan at all. But clinics need lots of working capital, all the time. There are payroll and overhead expenses, and those needs are immediate. Clinics also need to buy the latest medical equipment to provide the best care for their patients and to compete with other clinics and hospitals in the area.
  2. Doctors are spared from dealing with insurance companies. Dealing with insurance companies is one of the frustrating things about running your own clinic. Doctors often have to deal with insurance companies who just won’t pay the amount they billed. And then sometimes the doctors have to deal with a lot of paperwork. Even filling out information in the reimbursement forms is pretty tedious.

Many doctors are fed up with such requirements that they are saying no to insurance altogether. But with medical business receivable funding, you spare yourself from unnecessary headaches. That’s because it’s the lender who will collect the payments from the insurance companies.

  1. There’s no reason to hire staff or third-party billing systems for collections. This is another way for a doctor to save money. Dealing with insurance companies often means having to hire staff just for that purpose. But collecting the payment is part of the funding company’s services. So not only do doctors get the money they need, but they get this service as part of the package.
  2. Doctors will know in advance which insurance providers to turn down. Dealing with the insurance company sometimes result in underpayment. There are some insurance companies who won’t pay what the doctor charges them. Since the doctor believes that they didn’t get the money to which they were entitled, they may then react to this by no longer accepting patients who use that particular insurance company.

But with medical business receivable funding, insurance companies are investigated in advance. Also, a finance company that specializes in medical funding often has a list of insurance companies known to pay late or underpay. The doctor can then decide right away which insurance companies to refuse so that they don’t have to be underpaid.

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