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.