Cash flow issues are quite common among construction companies. The money coming in could be significantly smaller than the money going out, and sometimes companies get buried in piles and piles of debt just so their business could stay afloat in a highly competitive industry.
It also doesn’t help that payment deadlines in construction are typically set way after a project is completed. These deadlines can go between 30 to 90 days, and some companies cannot always afford to wait for payment in such a long time.
Material suppliers, in particular, usually have to secure supplies for a next project even before they get paid for a previous one.
Invoice factoring is one of the options that most constructional material suppliers look into to solve cash flow issues like this. While invoice factoring will not address all major financial difficulties, it certainly has its benefits, especially for material suppliers or distributors in the construction sector.
Get cash right when you need it
Having access to immediate cash is one of the topmost benefits of invoice factoring. Instead of waiting for 30 or 60 or 90 days until the clients pay up, the material supplier can instead sell their receivables to an invoice factoring company so they can get part of the payment right away.
Invoice factoring is extremely helpful if a material supplier needs cash immediately but their receivables are still many months away from being paid.
Say, for example, that there is a high demand of lumber in an area but there is little supply. This means that prices of lumber may go up. The hike in lumber price may happen right when a company is going through a difficult time with respect to their finances.
If this company has a new project for which they have to supply lumber, they may not be able to honor their contract since they do not have the money to buy expensive lumber.
The company can look into invoice factoring to help them out. If the company decides to factor their invoices and they get approved, they will immediately get the money they need to buy the lumber for their next project. They can even request the factoring firm to issue the advance payment through a method that is most convenient to them, like direct cash or money order.
Manage cash flow to maintain a positive working capital
Material suppliers will greatly benefit from a steady cash flow. You need to buy supplies, pay your employees, spend money on marketing, and so on and so forth. Business will operate smoothly if you have a steady stream of income coming in and invoice factoring can help you achieve this.
Instead of suffering through regular financial hiccups, you can instead factor your invoices so every time you issue an invoice, the factoring company can immediately give you the advance payment even before your clients have paid.
Having this security will help a company get peace of mind, knowing that they don’t have to wait for months for a payment that may or may not come.
Note that when a company enters a long-term invoice factoring contract, it also means that the factoring rates — the discount that the factoring firm takes from your full receivable amount — becomes lower. Cheaper discount rates mean that you get to keep more of your receivables, which means that you can get a steady a cash flow for a decent price.
Avoid taking in additional debt
During financial difficulties, material suppliers and other construction professionals usually resort to banking loans. While loaning money from the bank is relatively cheaper than invoice factoring, it also means that you are raking in more debt, which can lead to greater financial risks like defaulting.
Invoice factoring allows a company to survive through a difficult financial time without facing the risk of defaulting on a loan or ruining their balance sheets. Some banks also require construction loans to be spent only on specific items.
With invoice factoring, you do not have limits as to how you can spend the money you receive from the factoring company.
Bank loans are also not as easy to secure. Smaller suppliers and especially those that are just starting out a business may have trouble getting approved for a bank loan. Invoice factoring, on the other hand, are easier to apply to. Routine credit checks maybe performed on you and your clients and once you get approved, you can have the money right away.
Have experts manage your receivables
Another issue that smaller suppliers struggle with is managing their receivables. Not all companies have a dedicated accounting or bookkeeping team that can manage all the invoices, supervise the collection, and keep tabs of the deadlines and all payment records.
Invoice factoring allows a material supplier to get assistance from experts. Factoring companies take charge of the collection — they are the ones who communicate with the clients and collect the payment. They also manage your invoices and organize the paperwork, and some factoring companies even provide basic assistance on filing mechanics liens.
Note that when choosing a factoring company, make sure that you pick one that has a good track record in treating their clients. Since factoring companies will communicate directly with your clients, you do not want them to harass or intimidate your clients into paying up. An invoice factoring company that has a good track record of treating clients professionally will be an ideal candidate.
Protect your finances from delinquent clients
Since factoring companies give advance payment for invoices that have not been paid by the clients yet, one obvious question that comes to mind is: what happens if the clients don’t pay?
Invoice factoring actually offers a non-recourse option. This means that if the clients end up not paying your invoices, you are not required to buy back all the receivables that you have sold to factoring company. This is a good option if you have clients that have poor credit history.
Note that non-recourse factoring has higher rates than recourse factoring. Since the risks of non-payment are higher, factoring companies will also charge more. Not all factoring companies also offer this option so if you’re dealing with difficult clients, make sure that you’re picking a factoring company who accommodate the non-recourse route.
Offer payment flexibility to your clients
Invoice factoring allows you to have the money you need even before your clients pay. When you know you are going to receive the money from the factoring company just as you issue the invoices, you don’t have to worry about when your clients have to pay you back.
This means that as a material supplier, you can set flexible payment deadlines for your clients. You don’t have to pressure them into a 30-day payment deadline and you can even afford to be lenient in imposing these deadlines. The invoice factoring company will handle the collection for you, and you are guaranteed to receive the advance payment that will help you move forward to the next project.
Being able to offer flexible deadlines to your clients may give you a favorable impression. Suppliers go through difficult financial times, but so do contractors, subcontractors, and even property owners. Flexible payment deadlines can be appealing and can help you boost your business.
Allow growth for your company
Invoice factoring free up a lot of the typical worries for material suppliers, especially when it comes to finances. Because they don’t have to worry about securing immediate cash and they don’t have to handle their collection and basic bookkeeping tasks, they can now focus on improving other aspects of business including sales and marketing.
Small supplier companies often do not have time to dedicate to improving their marketing strategies and strengthening their sales presence in the competitive construction market. With the steady cash flow that they can secure from invoice factoring, you can invest more money and time on building up your business.
Keep in mind that while invoice factoring address issues regarding standing payments, it does not address long-term financial problems that may be due to deeper cash flow mismanagement issues. Focusing on improving other aspects of your company will ensure its growth and can hopefully help you relieve potentially bigger issues.