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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