Do you need construction finance? 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.
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.
Let’s consider how construction factoring or factoring applications for payment can help struggling building firms with cash flow.
How Does Construction Finance 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.
What Can it Be Used For?
- Payroll and Suppliers
- Improving Working Capital
- Negates the need to raise equity
- Gain better purchasing power
Certified Vs Uncertified
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.
Ultimately the solution has a marked effect on working capital, reducing administrative burden on chasing unpaid invoices.
Bad Debt Protection
A useful bolt-on product is bad debt protection, which can protect the business in the event that a customer fails to pay an invoice, or becomes insolvent.
Tailored Financial Solutions for the Construction Industry
Where you need invoice finance, bridging or development loans, credit insurance or a commercial mortgage, the team at Business Expert is here to help.
Call us now on 8000 24 24 51 to speak to one of our experts. Or email us your requirements for a same day quote.
Construction finance works on a rolling basis so, in principle, it can run for as long as you want it to, or as little as one month.
This depends in part on how quickly you can draw together the necessary paperwork. Generally, funding can be arranged within one week.
This depends on which provider you use. In addition to the standard factoring fees, most charge a set up fee + a service fee.
Both confidential and disclosed invoice finance are available, meaning you have the option to retain control of your ledger, or have the factor do this for you. In some cases, the factor insists on doing this themselves but this is case specific.
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 email@example.com for free and confidential advice from one of our professional advisers.