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Receivable factoring is important for cash flow in construction, but businesses must prepare before approaching a factoring company. Research a compatible and professional firm, only sell necessary invoices, and avoid default risks by selling only to reliable customers.
Receivable factoring allows construction companies to obtain an advance from a non-traditional lender against the company’s current open invoices. This type of financing is an important source of cash flow in the construction industry and can indemnify a business against downtime and slow payments from customers. Putting your house in order first, finding a quality factoring firm, selling only what needs to be sold, and being wary of the risk of default are four tips for navigating the construction factoring process.
Getting a house in order before contacting a construction factoring company will help ease the process. A factoring company purchases open invoices and initiates the collection process in exchange for a fee. The factoring firm has more leeway in making financial decisions than an average bank, but it needs proof that a firm’s customers will pay in a reasonable amount of time. Before approaching a construction factoring company, your business records should reflect both long-term client relationships and consistent payment patterns.
Comparative research should be conducted by the firm to find a construction factoring firm with a high level of professionalism and business practices that are compatible with its own. The factoring company will have direct contact with many loyal customers during the process of collecting open invoices. The customer service approaches of the construction factoring organization and the business should be similar. Customer alienation during collections is likely to have an impact on future business opportunities and a company’s overall reputation.
Only the amount of invoices that need to be sold should be sold. It is not required that all credits, or any particular percentages, be transferred to third parties. At first glance it may seem interesting to consider all bills in favor of available cash which will allow the company to grow beyond actual credits, but it is useful not to develop an absolute dependence on any single credit option in the event that the funding source is dry up in the future.
The default is always a risk. Working successfully with a factoring company requires as much attention to timely payments as any other credit report. Only sell open invoices from customers who have historically paid their bills on time. If invoices from customers who ultimately fail to pay or pay late are sold, it will damage the company’s position with the creditor, making it more difficult to obtain financing in the future. Avoid factoring invoices from new customers without a payment history and current customers who have had difficulty paying in the past.
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