It’s common for companies in the paving industry to give their commercial clients and general contractor customers up to 60 days to pay an invoice. Offering payment terms, as this is commonly called, is an industry practice that many companies follow. Your company has to offer terms to its clients, if it wishes to remain competitive.
Offering terms can create problems
Many paving contractors can run into cash flow problems because they don’t have the financial resources to offer terms, and operate their companies at the same time. When this happens, bills start accumulating as your company starts running out of money. This can force you to delay – or miss – critical payments. And if this is not handled correctly, it could threaten you ability to run your business.
How to solve this problem
One easy way to solve this financial problem is to ask customers to pay sooner. Usually, you have to offer them an incentive to pay quickly, such as a 2% discount for paying in 10 days. The problem with this strategy is that commercial clients may become concerned that your company is in financial trouble. Furthermore, even though they may start paying sooner, they retain the option to pay slowly. Because of this, while you cash flow may improve, it will not be predictable.
A better way to solve this common cash flow problem is to accelerate your revenues using construction subcontractor factoring.
How factoring solves this problem
This solution works by financing your invoices using an intermediary company. They advance funds, using your receivables as collateral. This provides your paving company with immediate working capital that can be used to pay business expenses. Also, you can use this facility to offer terms to your clients, because you can always finance a receivable if you need funds.
Most transactions are structured using two installment payments. The first installment is paid as soon as the paving work is completed and accepted by your client or GC. This installment usually covers about 70% of the gross value of the invoice. Your company gets the remaining 30% once your client pays the invoice, on their usual schedule. The finance fee is usually discounted from the second payment.
Who can qualify?
The most important requirement to qualify is to have commercial clients – or general contractors – that have good commercial credit. This is very important because the whole transaction depends on the creditworthiness of your invoices. Additionally, your receivables should not be encumbered by any liens or bonds. Lastly, your company should not have serious tax problems that could jeopardize your invoices.
Some challenges to keep in mind
Invoices that are due from contracts with pay if paid clauses cannot be financed using this financing tool. This is because payment of the invoice could be delayed – or cancelled – even though your have completed your work. Also, the factoring company will verify the invoices with your client to ensure that the work has been completed and that the payment is due. This requires client cooperation.
There are other possible issues with factoring such as client compliance and possible disputes which you should keep in mind.
Flexible financing for growth
The biggest advantage of using factoring over other solutions is that the line can be increased easily to match your growing sales. As opposed to conventional financing, getting a line increase does not require going through an extensive underwriting process. This makes it an ideal solution for growing commercial paving companies that have cash flow problems due to accelerated growth.