Contract factoring is a form of invoice factoring used by small construction companies to grow their business. When your invoices are purchased by a factoring company, they advance the business 80% to 95% of the total upfront. Once payment is collected from customers, the factoring company will pay the balance minus their fee.

Below, we’ll explore contract factoring and how it can help you grow your business.

Contract Factoring Defined

Since construction companies often face cash flow shortages, they often use contract factoring. This allows them to take on several larger jobs without having to wait for customers to pay.

Construction companies typically bid for more than one project at a time and have no idea which ones they will win. Contract factoring allows them to have continuous cash flow so that they can take on any project they win without having to be concerned about finances.

Advantages and Disadvantages of Contract Factoring

Contract factoring involves many invoices, which allows a factoring company to charge a lower rate. In addition, since factoring companies want to develop long-term, strong relationships, construction companies are able to negotiate discounts and since they are not regulated like traditional loans, a contract can be designed to benefit both parties.

If a construction company decides to factor all of its invoices, the factoring company can handle accounts receivable, freeing up resources. This also creates a clear line of communication with customers.

The primary disadvantage of contract factoring is that a long-term contract is required, along with contract minimums that must be met to avoid fines.

What Should You Look for in a Contract Factoring Company?

If you’ve decided that contract factoring is a viable solution for your company, you will want to consider the following:

Rates

Contract factoring can be expensive. Therefore, you want to choose a factoring company that has competitive rates.

Contract Minimums

Factoring companies typically have contract minimums that must be met- some of which are higher than others. Choose one that has a monthly minimum that is realistic for your business.

Minimum Annual Revenue

If your construction company is new, you’ll want to work with a factoring company with a lower minimum annual revenue. There are many factoring companies that specialize in start-ups and newer companies.

Fees

In addition to the factoring fee or interest rate, some factoring companies include other fees such as wire transfer and origination fees.

Funding Times

Funding time can be critical, especially if you need cash quickly. Some factoring companies guarantee same-day funding, while others wait 24 hours to several business days.

Conclusion: Use Contract Factoring to Grow Your Construction Business

If your construction business is unable to obtain traditional financing options, contract factoring can help you reach your goals. If you decide that this is a viable solution for you, make sure that you compare rates, minimums, fees, and funding times before choosing a company to work with. Also, make sure that you understand how the process works and that you can commit to a long-term contract. If you need assistance or want to know more, contact TCF Capital today.