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Overcoming Distinctive Challenges to Construction Factoring

Cash flow troubles can take their toll on any business even those experiencing an increase in customer demand and revenue. If a growing business isn’t receiving payment in a timely manner, it can slow growth down pretty quickly. Cash flow hiccups are one of the primary reasons companies turn to factoring accounts receivables with some industries such as manufacturing, oil & gas, staffing, and freight / trucking using it on a regular basis.

Yet when it comes to construction equipment financing, there is some trepidation among factoring companies about working with this sector despite the benefits. After all, construction financing and building, both the commercial and residential sector, is a multi-million dollar industry that’s looking to pick up again after being hit hard by the “Great Recession.”

Unfortunately, Some Factoring Companies Avoid Construction Financing

Construction FactoringThe apprehension about getting involved in construction equipment financing is a result of the somewhat complicated restrictions and conditions that apply to this industry. Rather than learning the language of this potentially lucrative industry, some invoice factoring companies opt to walk away instead.

Yet other reputable construction factoring companies do take the time to learn these rules and regulations so they can help construction and building businesses across the receivable factoring process.

Mechanic’s Liens, which guarantee the right to payment for all laborers and parties involved in the building project, from architects to carpenter to electrician and more, can present a special challenge for construction factors. For a large construction project, several different companies and subcontractors are involved. Per the lien regulations, everyone must get paid within 15 days of completing their portion of the work.

From an accounts receivable factoring perspective, this can mean that the invoice that was supposed to be “sold” to the factoring company is being used to pay workers within this tight timeframe. The construction factoring company, therefore, takes on the risk of not receiving the invoice, and this may come with little or no advance notice.

Erratic Billing a Problem for Some Factoring Services

The other headache for construction funding is the nature of billing for the industry. With so many different parties involved, an array of off-beat billing cycles (involving some being paid up front and others paid on the back end) it is difficult to keep track of it all. While other industries may have regular, reoccurring billing cycles, this is exceedingly rare when factoring construction. Each month requires new billing setup and verifications for all the different parties involved. Because of the extra work and higher risk, some factoring services just won’t work with construction.

So if you are in the building and construction industry, make sure the construction factoring company you are considering partnering with has sufficient knowledge and experience of your specialized industry.

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About the Author:

Robert Bernfeld started in the commercial finance industry in 1974. His early years included positions with Aetna Business Credit and Foothill Group. During the next thirty five years. Mr. Bernfeld established both equipment leasing and accounts receivable factoring companies. He partnered in founding Business Facilitators, Inc. in 1999. Mr Bernfeld graduated from the University of California, Riverside in 1974 and received his Juris Doctorate from Loyola University School of Law in 1977.

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