Ozarks Capital Funding

If you’re in the construction industry, you know how difficult it can be to manage cash flow.  You’ve billed out for one job and it will likely be at least 30 days before the money comes in.  Meanwhile, payroll and other recurring expenses must be paid much more quickly.   Construction invoice factoring smooths out the sporadic nature of cash flow and provides adequate working capital for new jobs.

Accounts receivable factoring is the purchase of a company’s receivables at a discount.  With factoring, the company receives an immediate advance on the invoices submitted.  Once the invoice is paid, the remaining balance (called the reserve) is remitted less the factoring fee.  A company should always negotiate for the highest advance rate possible, as that represents the reason companies factor:  instant cash flow.

Oftentimes, owners of construction companies are disappointed by the relatively low advance rates that are proposed to them.  There can be as much as a 15% difference between the advance rate given to a construction company compared to distributors, manufactureres, medical, and other industries.  This is because the factoring company has to mitigate their risk.  There is a greater likelihood in construction that the amount actually paid will be less than the amount billed.   Many clients of construction contractors and sub contractors set up their own reserve, called “retention”.    This is an amount of typically 10% that is withheld until the project is completed.  That’s why the factoring company must increase the reserve for construction company clients.   If the lower advance rate (and higher reserves) weren’t applied, the factor would be placed in a serious position of risk.