How to Use Factoring in the Construction Industry
If you’re in the construction business and you’re considering factoring as a way of generating quick income, you should be aware of a few points that may impact your decision. There are some unique aspects of the construction industry which cause it to be more difficult to fit into the factoring mold. However, factoring can still be extremely beneficial to construction companies once the little nuances have been worked out, and a good relationship has been established with a factor.
Challenges with construction industry factoring
One of the first challenges is that lien laws are constantly changing in every state of this country, which makes it necessary to constantly keep up-to-date with them. Contractors are also obliged to execute and offer lien releases for themselves on any jobs they take on. This would be in acknowledgment of payment receipts, and will generally have to cover sub-contractors as well. When larger jobs are involved, many contractors are obliged to issue billing at each step of a project, as recognized milestones are achieved. There is also a situation where contractors must withhold somewhere between 5% and 10% from every billing cycle, all the way up to project completion.
Another thing that makes construction companies more difficult for lenders to work with are the contract terms as they relate to work which has been accomplished. For instance, progress payment terms are often subject to individual interpretation of work which has already been accomplished, as compared to the total scope of any given project.
This can cause disputes between parties about how much of the work has actually been done. There are frequently different levels of approval for all work accomplished by a contractor, as well as the invoices which get submitted as a result. Since multiple parties have to approve work which has been done, it can cause delays in invoice processing and payment, and can generate quite a few opportunities for disputes.
Is your construction company considering factoring?
Factoring can be very beneficial for any construction company, and if you’d like to find out more, we can help you. Contact us at DrawBridge Capital to discuss some options for factoring with your construction company.