Construction Factoring – An Alternative Approach
Many construction factoring companies in existence today seem to take a fairly straightforward approach to their trade. It’s rather uncommon to see programs such as non-recourse factoring or spot factoring being made available to sub-contractors or general contractors. However, the truth is that many of these businesses may benefit from the alternative methods that are more readily available to other industries outside of construction. The following article highlights a couple of the more popular options that the best construction factoring companies can offer.
Recourse Factoring vs. Non-Recourse Factoring
To underscore the value of non-recourse factoring for construction companies, it will first be helpful to review a comparison of the two different types of factoring: recourse and non-recourse. Recourse factoring is where the working capital provider purchases a client’s receivables for a period of time, typically 60 or 90 days. If the client’s customer does not pay the invoice in full within that time period, the construction factoring company reserves the right to charge the client back for any unpaid balance. Non-recourse factoring, on the other hand, largely places the financial risk upon the working capital provider. In the event that the client’s customer does not pay an invoice due to bankruptcy or insolvency, the factoring company will write off the debt without expectation of reimbursement from the client. While the fees for a non-recourse facility are always slightly higher than those associated with a recourse facility, there are often instances where the non-recourse option may be in the best interest of the client.
Construction Factoring on a Non-Recourse Basis
Some industries, such as the transportation sector, see non-recourse factoring options quite often. However, other industries, such as construction, rarely see this type of product. There are several reasons for this, but ultimately it boils down to risk. There are a number of peculiarities within the construction industry that cause it to be assessed at a greater level of risk compared to other industries where factoring occurs. Due to this fact, it is quite difficult to find construction factoring companies that will offer a non-recourse product.
The good news is that there are some options available for sub-contractors and general contractors who are interested in non-recourse factoring. As the construction industry can be rather turbulent at times, many individuals may take comfort in knowing that they will not be held liable for repayment in the event that one of their customers goes out of business. Furthermore, if a customer does go out of business after an invoice is factored, the construction company will still have working capital to continue operating. To many, this peace of mind is often worth the slightly higher factoring fee they may incur under a non-recourse program.
Spot Factoring for Construction Companies
Spot factoring is an option where the client only submits selected invoices to the factoring company for processing. In other words, the client has the freedom to choose if an invoice should be factored or if they should simply await payment directly from the customer. There are typically no contracts associated with spot factoring and the client is free to come and go as they please. In the construction business, this may be beneficial as details can vary greatly from one job to the next. In some instances, additional laborers may be required or a large amount of materials may need to be purchased up front. In these cases, factoring may prove extremely helpful. However, in other situations, there may be fewer immediate costs that need to be covered. When this occurs, the client does not have any obligation to factor his invoices and, therefore, does not pay unnecessary factoring fees. Construction companies who are relatively new to the invoice factoring concept may also find comfort in knowing that they are not locked into any long term contracts with a spot factoring relationship.
What Next?
If any of these scenarios sound appealing, you are in luck. Orion Business Capital has working capital solutions for all of these needs and more. If you would like to learn more, feel free to contact us today. We will be happy to answer any questions you may have and help you determine whether invoice factoring is right for your business.