Specialized funding to help you complete construction projects on time.
You’ve learned from us how purchase order funding helps small businesses grow. Did you know there was a similar financial solution just for construction companies? It’s called construction factoring. Though considered a small business with less than 500 employees, construction companies do big business. They could have contracts in the six figures or even millions.
Not all construction companies will have a bulk of money on hand. You need the funds to complete the project and get more business. Banks aren’t always willing to fund large loans for small businesses either. That’s where construction factoring comes in. If you want to grow your small construction business, take a look at how this funding solution works.
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What is Construction Factoring
Construction factoring is a form of lending especially for construction businesses. It helps them get the money they need to complete projects for their clients. The construction companies don’t have to use assets as collateral. Instead they can use the contracts from their clients. It’s the same as a business using their accounts receivable.
Benefits of Construction Factoring
With this type of lending, you don’t have to worry about rigid credit requirements. Traditional lending institutions have strict credit score requirements. They may also want assets for collateral. Construction funding gives a cash advance based on the guarantee of business. Most construction companies benefit by using the funds to:
- Eliminate the need to deal with banks
- Pay contractors and staff helping with the project
- Have cash flow on hand for emergencies or unexpected expenses
- Buy supplies and machines to complete the construction project
How Construction Factoring Works
Let’s say your company signs a contract to build a $300,000 home for your client. You don’t have the money to buy construction materials, hire workers, and get special equipment. You can use the contract as a guarantee for a non-traditional lender to front the money. Before getting started, the construction company will contact the factor.
The factor will evaluate the construction company’s transaction. They’ll also look at the business’s overall financial capabilities. From there, they’ll make the decision whether to advance the money. If you’re a solid, reliable customer you’ll receive 70-90% of the total cost to build the home. So, of the $300,000 contract, you’ll get between $210,000 and $270,000.
Once the construction company completes the project, they’ll return the percentage (plus fees) to the factor. With construction factoring, it seems that everyone wins. The business has the working capital to complete the project, the client gets what they requested, and the factor earns their fee.
Once the construction company completes the project, they’ll return the percentage (plus fees) to the factor. With construction factoring, it seems that everyone wins. The business has the working capital to complete the project, the client gets what they requested, and the factor earns their fee.
Pros and Cons of Construction Factoring
Like with any form of financing, there are some things you’ll love and you could do without. Think about these pros and cons before deciding to cash in your construction contracts.
Advantages
- It’s a short term funding solution with a quick turnaround
- Easier than dealing with a bank or lending institution
- Gives funding upfront to complete client projects
- Flexible funding option without strict credit requirements
Disadvantages
- It’s a short term funding solution with a quick turnaround
- Easier than dealing with a bank or lending institution
- Gives funding upfront to complete client projects
- Flexible funding option without strict credit requirements
- Some factoring companies specialize in certain industries. For instance, they may only help construction workers who build restaurants and retail spaces. If that’s the case and you build homes or offices, you’ll have to look elsewhere for funding.
- Factor fees are more than traditional loan interest
How to Qualify for Construction Factoring
There are two main requirements you must meet to qualify for construction factoring. According to Entrepreneur Magazine, you need a clean slate as far as owing anyone else. Meaning, you can’t have liens in affect that would try to collect from the money. When the contract is complete, no one besides the factor should have access to the money.
There are two main requirements you must meet to qualify for construction factoring. According to Entrepreneur, you need a clean slate as far as owing anyone else. Meaning, you can’t have liens in affect that would try to collect from the money. When the contract is complete, no one besides the factor should have access to the money.
Your second condition is the construction company must be creditworthy. Keep in mind, this doesn’t weigh so much on a score or report. It weighs more on your track record and ability to pay. Factors will look at your financial ability and history with paying invoices. They will base their decision of if you qualify on what they feel you can handle.
Construction factoring isn’t right for everyone. As a startup or growing small business, it might be right for you. Even with the fees, you’re getting what you need to service your clients. After completing the project you’re also making money. The main thing is to make sure you work with a company that doesn’t just look out for them. Before making a commitment, be well informed. Ask the right questions, pay attention, and read all documents and contracts.
Do the Math and Ask Questions
Don’t go into a factoring deal blindly. Get all the information about expectations upfront. Calculate what fees you should expect to pay and what you’ll have left. Ask about any penalties or fees for breaking the contract. Some factoring companies may not even requirement a certain length for the contract. Find out if you’ll have to repay funds for unpaid home-buyer invoices. Compare the requirements of different factors before signing a contract.
Get Help With Construction Factoring Today
With many non-traditional lenders to choose from, it’s hard to tell who’s best. If you’re new to construction factoring, don’t feel intimidated. You can get help with working capital from a trustworthy factor. LenCred helps clients get unsecured funding like construction factoring. We’ll work with you to find the best funding solution with the right company.