Every business runs into a dark period at some time or another. Cashflow is the lifeblood of your business, and if it is disrupted, it can mean disaster. When running a contracting or subcontracting business, cash flow is especially important because you need to purchase materials and equipment in order to complete the jobs that bring in the revenue. It almost seems like a catch-22.
In this day and age, working with larger contractors can make this a reality for far too many subcontractors. The big guys generally take longer than 30 days to pay. In some cases, I've had clients that consistently get their invoices paid in 45-60 days. This is a huge drag on cash flow and financials, especially if your business is growing. But there are some solutions.
Can You Get a Business Loan?
I'm going to list this here, but be warned that it is extremely difficult in this day and age. Getting business loans is becoming harder and harder. Most of us don't even know why. Especially if you are in construction (which you probably because you're reading my blog!). There are some alternatives though, with the main one being peer to peer lending like Lending Club.
What Else Can You Do?
There are some other alternative to using a loan to fund your construction business as well. One of the most popular and effective ways to fund your construction business is using construction factoring.
Factoring, is when you sell your unpaid receivables at a discount, so you don't have to wait for your money. It's a pretty simple product actually, and it dates back centuries. Many of my clients have used factoring to successfully finance their operations, whether they are doing millions in revenue, or they are a small individual subcontractor working their trade.
This allows you to get cash much faster, so you can take on bigger jobs and ultimately grow and scale your business to new heights. Another major benefit, is that invoice or accounts receivable financing is based on your customer's credit and not your own. This makes it easier to qualify for, and is why it is most often used as an alternative to denied business loan applications.
The process can get confusing, but here it is in simple terms. A factoring company or a bank will review your invoices, and ensure that they are valid, the job is in fact completed, there are no disputes over the amount, and that your customer has solid credit history that proves they are able to pay the invoice. When that has all been verified, the lender usually forwards you between 75-90% of the invoice amount. The remaining is held in a reserve, just in case the customer doesn't pay the invoice. This protects the factoring company. When your customer pays, the payment goes to the factoring company. At that point, you are sent remaining balance of the invoice, and they take a percentage of the total face value out of this portion as their fee.
The overall fee usually ranges from 2-5%, and construction is unfortunately on the higher side of that scale in most cases. That's because it is riskier than many other industries.
But overall, construction accounts receivable factoring is a good way to fund your business, and I recommend it to more than half of my clients, because it is so flexible.