Construction Supply Invoice Factoring
There’s always been lag time in business when it comes to accounts receivable. The company may have sold millions of dollars of product last month, but the cash still isn’t in the bank.
Is there a solution to this scenario? In fact, there’s a choice with invoice factoring. A little help from a middleman can be the answer.
Defining Construction Supply Invoice Factoring
Invoice factoring may sound like a complex process, but it’s merely a buy-and-sell procedure. You have a certain amount of receivables on the books, which can number in the thousands of dollars. Instead of letting the books sit for 30 days or longer, you sell the receivables to a factoring company.
In turn, this company deposits funds into your checking account that equal the receivables total. The factoring company recovers the advance by collecting on the receivables. A small fee comes out of this exchange.
Breaking Down the Steps
The process of working with a factoring company is no different than everyday invoicing. Your accounting office generates an invoice. Don’t mail it to the customer, however. Send it out to the factoring company. These professionals perform the following steps, such as:
• Purchasing the invoice
• Advancing your business about 90 percent of the funds recorded on the invoice
• The factoring company collects the funds from the customer
With the invoice paid, the factoring company pays off the remaining balance due to the business. They simply keep a fee from that amount.
The steps are relatively easy when the customers pay off their invoices in a timely manner. Issues may arise, however, when an invoice isn’t paid. The factoring company will refer to their contract with the business to figure out a resolution.
Learning About the Benefits of Construction Supply Invoice Factoring
The main benefit stemming from invoice factoring is the immediate cash. You’re no longer relying on customers to send in their checks. The factoring company gives it all to you in a lump sum.
There’s no debt accumulation either. Factoring isn’t a loan. It’s simply an advance with associated fees.
The business also benefits from the fact that factoring isn’t associated with credit. Factoring companies are more concerned about your customers’ credit histories as they collect on the receivables. As a result, there are no credit checks or scores to worry about.
Comparing With Traditional Loans
As a business, you need cash flow every day of the month. Factoring makes this possible. Waiting for a loan to fund will take weeks at the very least. You also deal with credit checks and limits on the borrowed amount.
Factoring takes the waiting out of the picture. Your only limit is with the amount of invoices that you have in a given month. You’re able to keep up with cash flow so that payroll and other debts are met.
Working with a loan officer can mean real problems for small businesses. You may be an up-and-coming business with little history to prove your worth. The incoming sales show that you’re a player in the industry, and factoring companies can partner with you to keep that dream alive.
Contracting With a Provider
There’s an extensive agreement that’s signed between the two parties before any advances begin. The contract normally includes certain features, including:
• Volume amounts
• Advance percentages
• Fee structures
• Service lengths
Both parties must agree to a regular volume of invoices. Too few or excessive numbers will create problems with collections. A specific range is often agreed upon in the contract.
Although many companies adhere to the 90-percent advance amount, other companies look at alternative rates. Your company might receive a 70-percent advance, for example. Every business receives the full amount of the invoice less the fees at the end. It’s important to know how much your advance will be in case of a cash-flow problem.
The fee structure is normally straightforward. It varies from flat rates to percentages on the invoices. Read the contract very carefully.
Don’t forget that a service length is also defined. It might range from a few months to a year. Contracts are binding in these industries so reading the fine print is imperative.
In the factoring business, most companies are recourse oriented. The company has the option of selling back an invoice if a customer won’t pay on the debt. It’s simply a way for the factoring company to protect itself.
If you try to find a non-recourse company, be aware of the fine print. There are usually stipulations regarding outstanding invoices. They’ll probably be returned to you for a fee.
When you work in a complex industry, consider the services of a factoring specialist. They deal with your industry on a daily basis. Generalist factoring will serve most other industries. Simple invoices are their specialty.
Take control of your receivables with invoice factoring on your side. Many industries rely on this practice so that their bottom line is always covered. Stay in the black all year with invoice factoring.