Perhaps no other major industry is better suited for factoring than construction. Over the years, the peaks and valleys of seasons and construction cycles have worried both subcontractors and general contractors. Factoring now offers an economical and simple solution that can benefit both the contractor and the factoring company. Many factoring companies have even gone so far as to specialize in factoring for the construction industry, learning the unique language and subcontractors’ needs.
Typically, banks and construction subcontractors do not get along well with each other.
Construction is a risky business, and banks are only interested in reliable and reliable clients. If the contractor is new and growing or hasn’t had positive cash flow for several years, the banks won’t even let him in, let alone provide a business loan. There are many reasons construction is so financially volatile, but one of the main reasons is time delays and cost overruns, which are in construction. You rarely hear a construction completed on time and budget. The architect and the client inevitably change plans as construction progresses, resulting in increased costs and construction delays.
If you’re a plumbing subcontractor at a new city school and the local school board decides to change plans after it starts, you don’t know when you will be paid. Meanwhile, the plumbers who work for you expect to be paid weekly, and you will have to order and have on hand all the plumbing supplies needed for the school. The bank will not help the plumber, but factoring companies are the best suited for this situation. By purchasing receivables from plumbing subcontractors for a small factoring fee, the subcontractor can continue their business. Both the construction subcontractor and the construction factoring company benefit.
Another challenge for the construction industry is the scale and number of projects that can be done simultaneously. Building a building is a big deal. A simple contractor cannot take on more than a small team full of projects at a time. And the buildings are expensive. Contractors do not have the resources to carry out more than a couple of projects simultaneously. Most other industries do not have this problem. For example, a company that makes and sells vacuum cleaners may produce thousands of vacuum cleaners every day, with only a small fraction of the company’s resources and capital invested in each vacuum cleaner. After a while, the cash flow evens out, and the business becomes relatively stable. Construction companies cannot do this. If project problems become too serious for a poor plumbing company, they may have to go out of business. Again, a bank won’t help a plumbing company, but factoring companies deal with just such an ebb and flow in construction.
At the end
Factoring companies cannot change the nature of construction. Construction will always be subject to huge peaks and valleys, and each project will require a considerable investment of resources and capital for contractors. Because of this, factoring fees are usually slightly higher than in other industries. But for a construction subcontractor, this is usually a small price to pay for the peace of mind knowing they won’t have to file for bankruptcy.