Construction Receivables Factoring -
How to Collect on your Receivables before they're even due!
Diane Dennis Enterprises © 2004

A smooth, continual cash flow is imperative to the survival of any business. Unfortunately most businesses cash flow is based on how promptly their customers pay their bills. If you've got payables due next week but your receivables aren't due in for 30 days you've got a problem.

Many types of businesses have long had the option of "factoring" their receivables and now factoring companies are positioning themselves to factor receivables in the construction industry.

When you "factor your receivables" you are selling your invoice(s) to a factoring company. The factoring company pays you the $ amount of the invoice less a small discount fee (usually a percentage of the invoice).

Through many factoring companies you can have funds in one to two days, and then they collect payment from your customer when the invoice they bought from you comes due.

It's a tantalizing thought, being able to collect on your invoices in two days time... Imagine the strides you could make with your company if your receivables were available to you within two days after you submit your invoice(s)!

How can Receivables Factoring help you?

Consider XYZ sub contractor, who has completed a job for ABC general contractor and has submitted his invoice for $1,000.00 to the GC.

Normally XYZ would have to wait at least 30 days to get his hands on that payment. For smaller shops this wait can be excrutiatingly painful and it has been the demise of more than one shop.

Fortunately though, XYZ subcontractor now has two choices. He can:

1. Wait to get paid on the invoice and do without the funds until then. No problem as long as you have enough money in reserve to do without these funds until the GC pays the bill.
2. Sell the invoice to a receivables factoring company today and receive money within just a few days.

Now if XYZ doesn't need the money right now then he doesn't have anything to worry about. But if XYZ is a small shop with limited funds then factoring may be exactly what he needs!

With receivables factoring, XYZ Subcontractor (and YOU) can have:

• Top Quality Workers
  • Often times an employer will ask his employees to hold off cashing their checks for a few days. With factoring you never have to worry about losing your guy because you can't pay him. If you're short for payroll just run one of your invoices in to your factor and get cash for your payroll! Keeping your workers paid will translate into top quality workers. Plus, they'll tell their buddies and before you know it you'll have the top team in your field!
• More profit on each job
  • Suppliers prize customers that pay their bills on time. Often times your supplier will even give you a better discount on your purchases when you're a good payer. Lower material prices equals higher profits.
• Grow Your Business
  • With top quality workers on the job and suppliers at your beck and call, you'll become #1 in your field. With the reputation of being #1 comes more work! But you're okay because you have a steady cash flow, top quality workers and great discounts from your suppliers.
• Afford the best tools for the job
  • Next time that tool you've been drooling over goes on sale, YOU can BUY it! Sell an invoice to your factor and you can saunter into that store and pay for that puppy in CASH!
• Get a good night's sleep!
  • There's good things and there's bad things about being in business for yourself. By far one of the worst things is the sudden insomnia that develops immediately after hanging your shingle. You know what I mean, those nights when you look at your clock every hour until you finally fall asleep, two minutes before the time you're supposed to get up, and during those two minutes you dream about the zeroes in your checkbook, the same zeroes that kept you awake all night. Been there done that. Not anymore though! Now that I know that I can collect on my receivables, literally within just a few days of invoicing if need be, those zeroes no longer keep me awake. Now if I could just do something about that darn mattress spring!

All kidding aside, this is definitely a viable way to keep your business afloat during tight times and/or to grow your business when those opportune, yet often fleeting, moments present themselves.

How does it work?

What should a sub-contractor who is looking for cash with a short turnaround time do? First, he should contact several different receivables factoring companies. They may ask a few standard questions, like whether you, the sub-contractor has a bank line, whether you have any federal, state, or local tax liens, and whether the general contractor for whom you are working is bonded.

You can ask the factor for details such as points, the percentage you would be charged to factor, and how soon you might be able to receive funds.
 
An example of how the process works is: a sub-contractor would be able to receive an advance equivalent to say 70% of a specific single invoice totaling $100,000 - or $70,000 in cash that could be directly wired to his bank account. The fee to factor that $100,000 invoice for one month could be say $3,000. He would receive the balance of the money, equal to $30,000 minus the $3,000 fee, or $27,000, upon receipt of the funds due toward payment of the invoice. These figures are strictly hypothetical.

There are no minimum "quotas" to fill

You don't have to factor all of your invoices, you can pick and choose and do it as often or as seldom as you wish. Some contractors do it on a weekly basis, some on a monthly basis and others only occasionally.

You don't have to commit to any type of schedule, there are no minimum requirements to fill and you are the one to decide when and how often you "sell" your invoices.