It’s rare to come across a construction company that has more than enough money to finance each of its upcoming projects one-by-one. If you do, that company may very well not be around for too much longer. Because in this chaotic industry, it often seems that having enough money to easily finance your projects means not having enough projects to finance. Even the most successful construction firms are constantly finding themselves in cash squeezes. They have no problem obtaining contracts, but the amount of work required to stay vital and competitive can quickly eat up every last bit of operational funding.
The notorious business cycles of construction projects are almost entirely to blame. Not only do contractors have to go several months without being paid, but it’s also their responsibility to maintain the compensation arrangement as they work. There might not be a solution for this extremely common problem if construction was the only industry with elongated business cycles. But this is obviously not the case.
What Is A/R Factoring?
Accounts receivable factoring refers to the process of selling an outstanding receivable to a business lender, or a “factor.” In construction, an outstanding receivable is basically money you are contracted to receive at a later date. The job or phase of the job doesn’t have to be finished. So, yes, you can sell an outstanding receivable almost immediately after a new contract is signed. The client, however, must fulfill certain criteria in order for the factor to purchase the account, which is sold at a discount. As long as the client checks out, the contractor is paid everything he or she is contracted to receive right away.
It is now completely up to the factor to collect payment from the client. When this happens, the contractor gets paid the remainder from the first payment, minus a percentage. Both discounts are settled ahead of time, and will not increase no matter how long it takes for the client to pay up. If there is any reason to believe the client might not be able to make the full payment, the account would not have been sold.
You Don’t Have To Manage All This Cash At Once
Before delving into the numerous advantages of accounts receivable factoring, it’s crucial to point out that this type of working capital loan can be approved very quickly. The processes of determining whether an account is safe to purchase and figuring out the two aforementioned discounts sound complex but at United Capital Source, this can all be done in a matter of days. We don’t want your compensation agreements with clients to get any more complicated than they already are. The quicker you get your money, the higher the likelihood of you finishing your project ahead of time and securing a lifetime business partnership.
What makes accounts receivable loans even easier to manage is our ability to tailor cash distributions to your liking. Once we purchase the account, you decide if you want all the money up front or a little bit at a time. We can give you a certain amount of cash every two weeks, every month, etc. This system is ideal for contractors because their work usually progress in phases. They might be several weeks or months into the second phase even though they are yet to be paid for the first. But with accounts receivable factoring, you can get paid on a frequency that allows you to pay your workers on time and obtain any extra supplies you might need along the way, since different equipment might be needed for different phases.
Only Negotiate What’s Important
While the cost of factoring your receivables might be higher than a traditional business loan, you must understand that upfront cash is far from your only reward. Think about how stressful and time-consuming it is to negotiate with clients. Did you make sure to build storage costs into your contract in the event of a delay? Did you remember to follow up on your second payment requisition this month? Did you finish the proper documentation to officially close out the project and release retained money immediately after it was complete? Now, add suppliers to the mix. You have to negotiate with them, too, because you need extended credit but don’t want to pay too much.
When getting paid for an upcoming project is as simple as a phone call to UCS, your days are no longer obstructed by the many problems that stem from variable business cycles. You can pay your suppliers ahead of time in exchange for lower prices. And incentivize potential clients by agreeing to work around their terms. It’s the best of both worlds: No client is out of reach but you aren’t desperate for work. Rather than focusing on making sure you can afford the operation, you can devote more attention to the elements of contracts that are actually associated with the tasks at hand.
Don’t Delay: Get To Work!
At first, accounts receivable factoring appears to be a recipe for carelessness. You don’t have to worry about getting paid, so you become blind to cash flow issues. But as any UCS client can attest, accounts receivable factoring has complete the opposite effect. You learn how to schedule investments to increase profitability and save money. Successful companies know how to manage money, and accounts receivable factoring is your chance to put more money under your responsibility. It sounds strange but by relinquishing control of one thing (compensation), you gain more control over cash flow as a whole.