2016’s Subcontracting Growth Survey found that more than a quarter (27%) of contractors believed that late payment from prime contractors would be the most significant challenge that they would face over the upcoming 12 months. More than half of subcontractors also believed that they had no choice but to accept contract terms with larger construction companies or risk losing out on future business.
The industry’s power imbalances are well documented, with larger contractors enjoying a position of strength whilst smaller firms remain reluctant to negotiate contract terms in fear of revenue loss or becoming known as “difficult”. However, the impact of signing unfavourable contracts for subcontractors can lead to cash flow problems and in extreme cases insolvency.
Delayed payments and bad debts are serious threats within the construction industry, with business being forced to wait up to 120 days for payment of work completed. Workers and suppliers of materials are typically paid in advance, which can put cash flow under pressure, preventing profitable firms from moving on to the next job and seizing growth opportunities. Let’s consider how construction factoring or factoring applications for payment can help struggling building firms with cash flow.
How does it work?
Factoring applications for payments have been designed to ease cash flow for construction firms by advancing cash secured against the business’ applications for payment. It’s a type of factoring that enables businesses to receive an advance on the major part of the payment for a completed job. It can be used to help fund the next new projects, provide cash for new equipment or tools, help to pay off suppliers early to benefit from economies of scale discounts that may have been previously out of reach.
The provider looks at what the business is owed on a contract and advances a proportion of that amount. In this way, late payments become less problematic for businesses. Pre-payments tend to range from 40%-60% of the net value of the application, and businesses don’t have to commit the whole turnover to set up a facility.
There are options for both certified and uncertified applications. However, if the application is certified, it likely that the pre-payments will be larger. For businesses that need access to cash on an ad hoc basis, spot factoring applications for payment is where a single application can be factored. With these types of agreements, most providers require the application to be certified and prepayment ranges from 45%-65%.
Businesses may find that factoring applications regularly can be expensive as interest rates are high. Therefore, it’s more suited to a short-term cash flow fix. In a spot factoring agreement, the business isn’t tied to a contract and there aren’t any minimum fees, making it an effective solution.
Benefits of Construction Finance
The provider can also manage credit control and the collections process on behalf of the business to save time and money, leaving business owners to focus on what they do best, which is running the day-to-day business. Alternatively, there are confidential services that ensure that customers are unaware a facility is in place. A useful bolt-on product is bad debt protection, which can protect the business in the event that a customer becomes insolvent.
If you would like to know more about factoring applications for payment to ease cash flow and move on to your next big project, please call 08000 24 24 51 or email firstname.lastname@example.org for free and confidential advice from one of our professional advisers.