Construction factoring is a type of financing that allows construction companies to use their customers’ pending purchases (i.e. accounts receivables) as collateral for getting up-front cash. Also called “accounts receivable financing,” this type of loan is essentially a business cash advance. A small business might choose this type of financing for the common following reasons:
- to buy machinery, materials or other services needed to fulfill a construction project
- to get working capital for immediate costs like maintenance, emergencies, or even payroll
- to access capital when banks and other financial institutions will not lend
How Construction Factoring Works
A common example of construction factoring would be for a home construction business. For instance, say a company gets a contract of $500,000 from a homebuyer. However, the company does not have enough funds to actually cover the costs of building the house from start to finish.
So, they turn to what is called a factor. The factor reviews the homebuyer’s transaction, and, upon finding it a quality customer, the factor gives 70%-90% of the $500,000 to the construction company so the home can be built. The construction company pays back the factor once the project is complete. In some instances, it is up to the factor to act as collections and get money from the customer/bank directly after the home is built. In this case, the factor usually works closely with both sides to assure that the construction company delivers the products as promised. Once the factor receives payment from the homebuyer, the construction company then receives the remaining 10% -30% of the $500,000 (minus factoring fees).
So, in short, the factor essentially purchases the business’ transactions. Most often, the business is contracted with the factor to sell multiple transactions for a certain amount of money (or length of time). For single construction projects, some companies will choose spot factoring.
Finding the Right Construction Factoring Company
Getting a construction loan from the bank is usually best, but not every construction company gets accepted. Unlike a traditional lender, a factoring company is less concerned about your credit score and more concerned about cash flow – making it easier to get a loan.
A number of construction factors have appeared in recent years, so finding the right loan can be difficult. Fortunately, you don’t have to do all this searching yourself. Here at Lendio, we connect you to the factors that will work best with your business. Use our free loan match tool to see your construction factoring options.