Are You a Subcontractor? Learn How to Finance Your Company with Construction Factoring

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Managing finances for a subcontracting company is often complicated. The standard practice of general contractors is to make payments to subcontractors a month or two after work is completed, far after the bills for the relevant supplies are due. Consequently, it may often be beneficial to hire a service called construction factoring. The factoring companies can help subcontractors manage their finances, check into the credit histories of certain customers, and even provide large advances on invoices of delivered services or products.

There are a number of challenges that come with owning or managing a successful sub contracting business. One of the bigger challenges involves managing slow paying customers, since they can have a negative impact on your business. For example, most of your general contractors (GCs) will want to pay you 30 to 50 days after delivering your services or finishing a stage. However, you need to pay employees and suppliers a lot sooner than that. Unless your company has a substantial bank account, you will soon run into problems unless the financing is managed properly.

Some subcontractors try to negotiate quicker payments from their GCs. However, that strategy doesn't work very often. Another strategy is to apply for a business loan from your local bank. However, most banks will not lend money to a company unless it has substantial assets and can provide financial statements showing two years of profitable operations. This puts business loans out of the reach of most subcontractors. So what alternatives do you have?

If your biggest challenge is that your clients take too long to pay, you should consider construction factoring financing. Construction factoring offers a simple proposition. The factoring company advances you up to 80% for your invoices on delivered and accepted services (or products). This provides you the necessary funds to operate your business. Once the client pays, you get the remaining 20%, less a service fee.

As part of their services, factoring companies will check the commercial credit of your customers. This helps ensure that they only finance invoices that have a high likelihood of being paid. You can leverage this service, which most factors provide for free, to help ensure that you only work with financially responsible companies. Construction factoring companies consider your customers' commercial credit as one of the main requirements to qualify. That means that if you deliver quality services and work for good GCs or builders, your chances of obtaining financing are high.

If factoring is an option you want to pursue, you should keep in mind that the factoring company will need to verify each invoice it finances. This means that they will call your customer to verify that they are happy with the rendered services. Also, be aware that factoring companies cannot factor invoices for contracts in which the GC will only pay you, if and when they get paid.

About the Author

Marco Terry is managing director at Commercial Capital, a leading construction factoring company. For more information, please go to or call 877-300-3258.
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