Construction factoring is a form of business funding that allows businesses to access a portion of their outstanding invoice values—for a cost. Construction factoring companies, like trucking factoring companies, buy your outstanding invoices for a discounted price and then take over collections. The construction factoring rates that they attach to your funding will determine how much of a discount your construction factoring company will buy your invoice at. All in all, construction invoice factoring is a convenient but often costly financial solution for construction subcontractors and contractors alike.
Unfortunately, construction factoring financing is actually pretty hard to come across, and even harder to qualify for. For the very reason that construction factoring ought to be a common solution—the long-outstanding invoices—many factoring companies consider construction companies and subcontractors in a “restricted” industry.
That said, you’ve still got options for construction factoring, and you’ve also got some pretty stellar contingency plans if you’re not able to make construction factoring work.
Here is your ultimate guide to navigating the complicated world of construction factoring in 2020.
One question that comes pretty naturally for business owners looking for construction factoring: What are the best construction factoring companies to seek this type of funding from?
Unfortunately, many factoring financing companies consider construction a restricted industry. The way many factoring companies see it, construction subcontractors and companies don’t get paid quickly enough to be able to pay back short-term funding. And to be sure—factoring is one of the shortest-term forms of funding on the market.
And this makes construction factoring a pretty niche form of funding—only so many companies will provide factoring services construction subcontractors and companies. As a result, your list of construction factoring companies to choose from will be a short one.
That said, one of the best factoring companies on the general market is willing to work with small businesses in construction, so let’s learn all about them.
As for your options of construction factoring companies, BlueVine takes the cake for the best construction factoring rates and terms of any other factoring company that works with construction businesses.
BlueVine can offer construction factoring of anywhere from $20,000 all the way up to $500,000. Of course, the amount you’re able to secure in construction factoring will rely on your outstanding invoice value, so you should only expect a portion of that value at the very most. Additionally, depending on the number of weeks your invoice is outstanding, BlueVine can provide repayment terms ranging from 1 to 12 weeks long. BlueVine will charge their construction factoring rates in the form of a weekly discount ranging from 0.4% to 1%, depending on your creditworthiness and your invoice quality.
To qualify for this construction factoring company, you’ll need to meet their minimum borrower credentials:
Plus, you must work as a business-to-business model, rather than a business-to-consumer model, and, of course, you must invoice your customers.
Even more, you won’t be able to access BlueVine construction factoring for invoices that are past due. So, if you want to factor an invoice that a customer is delinquent on, BlueVine won’t be able to help you with that.
Finding factoring for construction subcontractors, though not easy because it’s still construction factoring, won’t be much more difficult than finding construction factoring as a contractor.
That said, be sure to have your documents and financials in order before you try to access construction factoring as a subcontractor. Making sure you have a business checking account and have your business and personal finances tidy will up your odds of approval that much more. At the end of the day, being a subcontractor will only detract from your chances of accessing construction financing if you haven’t taken time to make sure your documents and finances are tidy and ready for underwriting.
Now that we’ve taken a look at what construction factoring is, and which construction factoring companies can offer you the best construction factoring rates, let’s zoom out a bit.
What are the most notable features of construction factoring that you should lend special attention to as you decide which business funding options you want to apply for?
Just like any other form of funding, construction factoring comes with its own highs and lows. Let’s take some time to explore the most notable advantages and disadvantages to funding your construction business with factoring.
The main advantage of construction factoring is likely the reason you’ve sought it out in the first place—it allows you to access a portion of your outstanding invoice value earlier than you would without construction factoring.
Let’s say, for instance, you’ve invoice your customer for a $100,000 project, and the invoice is due in a month. However, the day after you send that invoice a massive project presents itself that will require $50,000 to execute. Without that invoice fulfilled, you might not be able to finance this new project, but the new customer can’t wait the month for you to access payment from your invoiced customer.
This is the exact situation that construction factoring is meant to address. To finance your new opportunity, you can factor your outstanding invoice. Let’s say, for instance, your chosen construction factoring company buys your invoice for $96,000. Though you won’t be able to access your full invoice value if you factor it, you’ll have a portion of your invoice when you need it, and that’s certainly worth paying for.
Even more, a big draw of construction factoring for some business owners is the fact that construction factoring companies, or even trucking factoring companies, take over collections. This removes the headache of chasing down customers to make sure they pay you for your projects. Because construction factoring companies technically buy your outstanding invoices for a discount, it’s on them to makes sure your customers fulfill their invoices.
That said, for all of the upsides to taking on construction factoring to fund your business, there are also plenty of downsides. In order to grasp this financial option fully, be sure to dedicate a fair amount of attention to the not-so-great parts of construction factoring.
Here are the most notable downsides to using construction factoring as a small business loan.
When you calculate the cost of construction factoring by interest rates and especially by APRs, it can be astounding just how expensive this form of funding is. Because construction factoring is such a short-term form of funding, the APRs—or annual percentage rates—attached to it can be astronomical.
Losing out on such a large chunk of capital—the discounted portion of your invoice—in such a short amount of time could seriously hurt your business’s cash flow, so definitely think twice before taking on construction factoring.
While the fact that construction factoring companies take over invoice collections might be an upside for some construction entrepreneurs, it could also very well be a downside for others. Because your construction factoring company will own the invoice you factor, they will be in contact with your invoiced customer or customers to speed the collections process along. This means that your customers will know that you’ve taken on construction financing. Plus, this also means that you won’t have much control over the collections tactics that your construction factoring company employees. As such, you should be sure you only choose to factor with a company that you trust to treat your customers with respect and professionalism.
If the list of construction factoring companies to choose from is too limited for you, then you should seriously consider seeking invoice financing for your construction business.
One of the best parts of invoice financing is that it’s a secured form of funding that won’t require external collateral. Generally speaking, secured funding helps businesses access better rates and terms than unsecured funding does. That’s because the collateral that makes secured funding, well, secured mitigates much of the risk that the lender takes on. Instead of the rote transaction that construction factoring involves—the discount buying of an invoice—invoice financing allows construction companies to access debt funding that’s secured by the invoice itself.
As a result, construction companies will be able to remain in control of the collections process with invoice financing, rather than having to hand over the reigns with invoice factoring.
If you’re worried about construction factoring companies interacting with your customers, then you should pivot your funding search to invoice financing rather than factoring.
One of the very best invoice financing providers on the market, Fundbox also just happens to work with construction businesses, as well. Fundbox offers invoice financing of anywhere from $1,000 all the way up to $100,000, with repayment terms from three to six months, and weekly discount rates of 0.5% to 0.7% of your invoice value.
Of course, to qualify for invoice financing from Fundbox, you’ll need to be a business that invoices its customers. Additionally, you’ll need to use an accounting software to be able to sync your finances with a Fundbox account. Other than those two details, you’ll simply need to be based in the US or US territories, and you’ll need to have at least six months of business under your belt. If you check off these four simple boxes, then you’re eligible for Fundbox invoice financing for your construction business.
If you’re not quite convinced that construction factoring is the right form of funding for your, then you should look beyond your short list of potential construction factoring companies and consider equipment financing. General speaking, equipment costs will be one of the largest costs of running a construction company. Even as a construction subcontractor, you’re often expected to show up to the work site with your own tools for your specialty.
So why not consider financing that equipment rather than factoring your outstanding invoices? Equipment financing will allow you to access capital specifically for purchasing equipment to grow your business. That equipment that you purchase will, in turn, act as collateral for your equipment financing. Because equipment financing is self-secured, you’ll be more likely to qualify for it and access more affordable rate and terms when you do. Interest rates for equipment financing typically stay between 8% and 30%, repayment terms often stretch as long as five years, depending on the expected life of the equipment.
Additionally, you’ll be able to access up to 100% of the value of the equipment you hope to purchase, which could end up being much more than you’d be able to access through construction factoring.