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Receivables factoring enables construction companies to obtain an advance from a non-traditional lender against the company’s current open invoices. This type of financing is an important source of cash flow within the construction industry, and can indemnify a company against down times and slow payments from customers. Putting the house in order first, finding a quality factoring company, selling only what needs to be sold, and staying mindful of default risk are four tips for navigating the construction factoring process.
Putting a house in order first before contacting a construction factoring company will help facilitate the process. A factoring company buys open invoices and undertakes the collection process in exchange for a fee. The factoring company has more leeway in making financing decisions than an average bank, but it does need evidence that a company's customers will pay in a reasonable amount of time. Before contacting a construction factoring company, business records should reflect both long-term relationships with customers and consistent payment patterns.
Comparative research should be done by the company to find a construction factoring company with a high level of professionalism and business practices that are compatible with its own. The factoring company will have direct contact with many loyal customers as it goes about the process of collecting on open invoices. The approaches to customer service of both the construction factoring organization and the company should be similar. Alienating customers during collections will likely impact future business opportunities and the overall reputation of a company.
Only the amount of invoices that need to be sold should be sold. There is no requirement that all receivables, or any particular percentage, be given to the third party. It may seem attractive at first to factor all invoices in favor of cash in hand that will enable company growth beyond actual receivables, but there is value in not developing an absolute dependency on any single credit option in case the source of funding dries up in the future.
Default is always a risk. Successfully working with a factoring company requires the same attention to timely payments as any other credit relationship. Sell only the open invoices of customers who have historically paid their bills within established time limits. If invoices of customers who ultimately don’t pay or pay late are sold, it will damage the company’s standing with the lender, making it more difficult to obtain receivables financing in the future. Avoid factoring the invoices of new customers without a payment history and current customers that have had difficulty paying in the past.
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