The Factoring Funding Option

From any business perspective, no matter what the field, cash is king. It is the most important factor in determining whether your business will prosper. Having cash on hand is not only essential for day-to-day operations, but it also affects the ability to grow. If a small- to mid-size business’s costs outweigh profits, even for a brief period, it could be tremendously detrimental to the future of the business. This is particularly relevant for the construction, contracting and excavation industries, which rely on customer payments to generate cash flow. Sometimes, temporary additional funding may be necessary to sustain a business and, when that happens, a factoring institution can help manage the financial risks that arise and ensure that the business will succeed.

Factoring institutions assess the general viability of a business and determine if it is a good business model with a reasonable outlook of profitability. When the business has a strong base of creditworthy customers, factoring companies will buy its invoices and provide the liquidity needed to fuel operations. Some customers feel consulting a factoring institution is a sign of poor business management. They are operating under the assumption that if a business seeks funding from a factoring institution it is running out of money due to poor planning or impending bankruptcy. However, in most cases, nothing could be further from the truth.

Often, a business needs financial assistance because of rapid growth and expansion. Perhaps a contractor has increased his or her company’s volume, outpacing what it normally would have done in years past, and the time seems right to grow the business.

Yes, it costs money to expand, but neglecting to expand a business when the opportunity arises could ultimately hurt the business.

Factoring institutions allow business owners to have cash on hand to develop the company as they see fit. Having easy access to capital can also help business owners take advantage of quick-pay discounts. These offers allow a business to receive discounts on merchandise and equipment if it pays within a prescribed number of days, which can help offset the cost of factoring and makes a big difference on a business’s bottom line.

Sometimes clients come to factoring companies because of circumstances beyond their control. For example, an excavator sought assistance because he was short on cash flow but growing very rapidly. He had a good customer base, but they were slow to pay him for the jobs his company had completed. He needed money to pay his staff, bills and for day-to-day operations. Unlike banks, whose loan methods are a passive process, factoring can offer clients an active process that not only provides funding against a business’s invoice, but also manages collections.

The biggest way construction and renovation businesses can mitigate financial risk is through consistent backup documentation. Yes, an invoice is a good start, but it’s not always enough to ensure reliable payments should a business decide to enlist the help of a factoring company. Make sure the specific payment terms are contained in the face of the invoice, making the terms of payment legally binding. It’s also crucial to save copies of purchase orders and receipts.

This allows an insurance company to review these documents and confirm the work hours and purchase receipts, and to know how much money was spent at each job.

Having backup documentation will always assist with the collection of the invoice. Consider adding a signature line on the invoice where customers acknowledge that they have accepted the terms of the invoice and will pay back the money that they owe, which will help bind their responsibility.

One of the products that a factoring institution can offer clients is credit insurance. These programs cover the invoice if a client’s customer goes bankrupt, becomes insolvent or extends the terms of the payment more than 90 days past the due date on the invoice. If there is a legitimate claim to be made, it helps alleviate the risk of a lending institution and gives business owners the peace of mind that they will be compensated for the work that they’ve done.

Many small- to mid-size business owners may be uncertain whether it is the right time to secure financial assistance from a factoring company. Most customers say they wish they had called several weeks before they did. That is the point when customers need the most help, and factoring companies are happy to be there for them in any way they can.