Contractor Financing Solutions – Where to Turn?

General contractors, in particular, often face financial challenges. Sometimes they’re unable to pay their bills on time (particularly upfront project costs) and those invoices are inevitably paid late. This is significant because half of all contractors don’t get paid on time and that creates some obvious pitfalls when a contractor applies for additional project funding, as traditional banks tend to exercise a high level of caution when making the determination to loan a general contractor (or sub-contractor) additional funds for a project when payments or paybacks aren’t consistent.

Invoice Factoring

Invoice factoring can provide a short-term loan to help your business keep thriving and growing. Pros include that you’re able to invest the money in labor and materials while the company is waiting on payment. There are some cons to this program, but they can be balanced with the cost of the option.

• • When someone needs to pay a cash advance on an unpaid invoice, that person will work with an outside entity that provides a cash advance minus a fee. The outside entity will review the invoice before releasing the funds.

  • A contracting company can sell invoices it hasn’t been paid for with a factoring company quickly and receive most of the money owed.

  • Once the client pays for the invoice, the contractor will receive a percentage of that payment minus service fees.

• The contractor gets money upfront to cover operational costs, while the construction factor waits for payments before operating.

Businesses that Benefit from Invoice Factoring

The Startup

Starting a new construction business can stall progress when cash flow stalls. Factoring in invoices for early-stage construction businesses has the benefit of providing more capital to take on more projects. It can be worth the downsides of creating an increase in cash flow that is subject to conditions such as late payment and increased mileage.

The Strugglebus

When you have money trouble that persists because of cash flow and budgeting, an alternative to traditional financing such as invoice factoring might be a good financial solution. Always consider your business as the most important aspect of your life, or else you may encounter further financial hurdles on the horizon.

The Nowhere to Turn

In addition, securing a contractor loan or line of credit can be difficult for many businesses in the construction industry because they’re often viewed as too risky by traditional financial institutions. Unfortunately, for contractors with limited, poor or no credit history, it can be nearly impossible. Contractor factoring involves less red tape and fewer hurdles to jump through, enabling companies routinely passed over by traditional lenders to more easily gain access to funds when they need it. Despite these advantages, there are other elements to factoring that should be carefully considered.

Drawbacks of Contractor Factoring

Customer Service

One drawback to factoring is the customer will know you are dealing with cash flow problems. The third-party company has no control over how payments are collected, and these optics can affect your credibility. Working with a company that you trust is key while considering this option.

Timeline Limitations

If you need the cash up front before your work is completed, contractor factoring isn’t an option. If the customer doesn’t pay for the invoice within 90 days, you will have to finance it. One good financing option is invoicing a project or pre-buying materials.

Outrageous Fees

Yes, an invoice factor can increase your cash flow – but this translates to the loss of the money that was in your account. Invoice companies charge rates between 1% -6%. For contractors with a cash flow problem already, this could be another damaging business card to their productivity.

Banking may be difficult for those in the construction industry, as banks are often reluctant to do business with them for fear of risk and less documentation. Factoring can help – it is less risky and requires less documentation. Contractor invoice factoring has a lot of benefits, but it also has some drawbacks.

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Line of Credit or Credit Extension

A credit extension or line of credit is getting a credit limit that can be tapped whenever (for as much or as little as expected) from moneylenders like banks or credit associations. This sort of adaptable support is there when you really want some additional padding, and you just pay the interest on the outstanding balance. However, contractor lines of credit are almost always secured and not something you would want to max out. As is the case with credit cards, carrying a large balance on your line of credit is not ideal.

Some Things to Consider When Taking Out or Applying for a Line of Credit:

Credit limits for General Contractors

Credit limits on your credit extension might vary. If you miss an installment or end up paying outside of their “good grace window,” it’s generally expected to see your credit extension cut down the middle or have the amount available to you cut in half. This can make you reach your limits quicker than anticipated. Since contractors frequently battle with income and may not necessarily have the money expected to make an installment, this places additional stressors on subs and vendors up and down the supply chain.

Contractors Experiencing Trouble Getting Extra Credit

To get the credit extension, the bank will frequently put a sweeping lien on your business. This could make it harder for you to acquire extra credit, in light of the fact that the main lien holder (the bank) needs to give consent for you to take on more debt. Be that as it may, not all supporting choices put a lien on the business, in which case consent from the bank wouldn’t be required.

Construction Project Payback Options / Installment Terms

BE SURE TO READ THE FINE PRINT! Decide if there are charges related, what the reimbursement plan is like, and whether there are late installment punishments.

Construction Financing via Credit: Risk vs. Reward

Consider the legitimate ramifications of taking on a credit extension, particularly the enormous sums that are often underwritten by business insurance. Assuming that you default on installments, this could bring about loss of resources, liquidation, or dispossession of the business.

Not Relationship-Based

Because credit extensions are given by banks, you can anticipate that they would be firm and indifferent. Since they work with the severe rules and strategies of large companies, they miss the mark on the personal touch. Banks won’t typically go the extra mile to get to understand your business, your projects or your conditions, and by and large don’t take the time to develop and cultivate relationships with the organizations they’re loaning to.

Construction Project Funding from a Business Credit Card vs. Credit Extension/Line of credit

Similar to a credit extension, a credit card will have a limit you can spend. Nonetheless, charge cards are quite often unstable, though credit extensions are commonly gotten in the business. Visas for the most part accompanied lower credit limits than credit extensions, making them less valuable to contractors, whose costs could eat into a credit limit quickly. Despite the fact that business credit cards commonly offer bonuses, this advantage is handily invalidated by the expenses and expenses related to charge cards. You wind up paying a significant measure of cash for little advantages like a “free outing” and other unimportant “rewards.”

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Project-Based Contractor Financing

Project-based construction project funding is ideal for the individuals who need to collaborate with finance specialists who center explicitly around the development business, grasp your business all around, and give key direction and backing to the progress of your business. Development funding accomplices commonly have practical experience in loaning to explicit parts of a venture — materials, work or hardware — and, not at all like customary monetary establishments, they loan in light of your task versus exclusively your FICO rating.

Materials are a well-known choice for project-based contractor financing in light of when materials are required compared with the time a contractor is paid for their work. Moreover, providers by and large require either installment forthright or based on conditions, however even terms are not sufficiently long enough to bridge the gap between when a GC needs to cover materials versus when they’ll be paid for the job.

There are a ton of choices for funding your development business. Furthermore, there are various sorts of monetary foundations that you can work with. Make certain to find a loan specialist that grasps your business all around, focuses on contractors, and knows the difficulties of development installment cycles. This understanding will be paramount when tasks are deferred and advances become due.

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Portions of Your Construction Business that You Can Finance

Contractors & subs commonly finance materials, work or hardware. Consider how every choice will assist with accomplishing your business objectives prior to picking which portion of your business or project you leverage.

Funding for: Work

In addition to materials, work is an enormous expense for contractors and incorporates pay rates and wages, advantages, and charges for your teams and the board. Taking care of these assessed costs preceding nearby work will permit you to finish projects without running shy of assets for finance effectively. Work is normally paid for through income, overwhelming the business, particularly while you’re managing slow-paying clients. Taking out a SBA loan or credit extension from a bank or credit association could be a possibility for supporting work.

Funding for: Materials

Materials are generally supported through either Mastercards or provider terms. Mastercards are a simple method for purchasing materials now and paying for them later.  However, they are typically connected with more modest credit limits, which restrict the size of procurement you can make. Provider terms, again, permit you to get materials now and pay your provider back in 30-60 days. Nonetheless, development installment cycles make this difficult, and the bill is oftentimes due before installment has been gotten for the gig.

Funding for: Hardware

Hardware is one more typical cost to back. Development hardware is costly and buying it through and through could cause a significant burden on income. Hence, supporting hardware is an extraordinary approach. While supporting gear, credits are commonly amortized and every month a piece of interest and chief is repaid. When the advance is completely paid off, any liens on the gear are eliminated. Hardware renting is another choice in the event that you like to rent rather than own. You might be more disposed to rent on the off chance that new models become available and you would rather not put a large chunk of change down on a buy.

Consider Your Contractor Financing Options Carefully

In the end, exploring all of the options available for project financing will be critical. Contractor financing ought to be an enhancement to your business and furnish you with the adaptability to carry on with work based on your conditions, your projects, and your competing timelines. Furthermore, it’s vital to track down the right supporting cast of funding options and financiers, preferably those that grasp project development and can be amenable when inescapable difficulties emerge.

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How Can fincentiv™ Help?

fincentiv™ is the first platform to use a proprietary matching system to match the financing needs of contractors with a spectrum of different lenders and lending options. fincentiv™’s matching using its lendcentiv™ model to connect borrowers to lenders. Our platform does the work for you by narrowing the field from thousands of lenders to match you with a select group of funding opportunities. You simply create an account, fill out your company profile, and upload the necessary loan application documentation; we take care of sourcing the lenders for you!