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Construction Factoring Suffers Along with Construction Industry

By Kristin Gabriel

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Published: 23Apr2010
Word count: 491
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It would appear that few companies are financing businesses in the construction industry today. As builders know, the industry risk is still too great. Many general contractors and subcontractors are reeling from the effects of the building bubble.

And on top of this, to add insult to injury, many construction companies who obtained a business loan will probably, or already have found themselves out of covenant. This is due to falling sales. Simply put, banks won't let them tap into their lines of credit until their sales are back on track.

What's more, even in the factoring industry, few companies dare to offer construction factoring since the risks of default are still high. However, in many cases a factoring company will be able to help. There are quite a number of firms specializing in construction factoring.

Historically, construction factoring has been used in the construction industry for years. The latest trends indicate that the recent economic downturn and tightening of the credit markets has been especially hard on the construction industry. Along with having to focus on the new sustainable building and changes in building code standards, contractors are experiencing cash flow problems. Because the availability of commercial financing has been chaotic for the past year, this situation is especially evident when seeking construction funding for commercial property.

Factoring allows businesses to obtain funds based on their current accounts receivables. Typically construction subcontractors have to wait as long as thirty to sixty days to get paid for their invoices. Construction factoring advances funds against invoices and provides enough money to pay the bills when things are tight.

Following are a few things you can do for starters, to prepare better if you are in the construction business. Before calling any business finance company, be sure to have your house in order, specifically:

1. First, make sure you have up current, up to date financial statements. This includes a balance sheet, income statement/Profit & Loss, A/R aging report and AP aging reports
2. Handle any unpaid taxes as best you can,
3. Try to clean up your receivables - and handle any accounts that are past due for more than 60 or 70 days.

Although there are no guarantees in this economy, these three steps that should help you better position your company for funding.

Also remember that the construction industry is one of several sectors that can benefit tremendously from invoice factoring. The sub-contractor, or construction company is no longer required to wait for payment before starting on the next phase of a project, or begin construction on a new project.

Invoice factoring enables the sub-contractor or construction firm can realize quick turnaround (often within 24 hours) on accounts receivable due for completed stages of a construction project. With construction invoice factoring, the construction company, or sub-contractor, can be paid virtually overnight for these invoices (accounts receivable) thus speeding up cash flow and improving the company's ability to start immediately on the next phase of construction.

Kristin Gabriel is a writer who works with The Interface Financial Group (IFG), North America's largest alternative funding source for small business. The company provides short-term financial resources including invoice factoring, serving clients in more than 30 industries in the United States, Canada, Australia and New Zealand. IFG offers expertise in factoring, accounting, finance, law, marketing and banking.

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