You may have heard that invoice factoring is like a loan. While the practice does have some similarities to loans, invoice factoring can be a more flexible option for improving cash flow without incurring long-term financial obligations.
Invoice factoring does not create any liabilities or put any assets at risk, so it does not qualify as a loan. Think of it as more of an advance on accounts receivable where your business does not take on any debt.
With construction invoice factoring, an invoice factoring company purchases outstanding invoices and collects a processing fee once the invoice is paid. It’s very similar to any asset-based finance, but the outstanding invoices take the place of collateral.
So, how does invoice factoring work, and how can it benefit a construction company?
What is Invoice Factoring UK Procedure?
Invoice factoring in the UK is a cash advance for outstanding receivables. As stated, it’s not a loan, but there are invoice factoring costs associated with the process.
The invoice factoring example outlined below provides a general overview of how the process works.
- The construction company sends the invoice to the customer as usual.
- The company signs an agreement with the invoice factoring company, which advances a portion of the total outstanding amount (usually around 80%).
- The invoice factoring company is now responsible for collecting payment and will abide by the prevailing credit terms (usually 30 or 60 days).
- The remaining amount is paid to the construction company minus the agreed-upon invoice factoring costs.
The Advantages of Small Business Invoice Factoring
What benefits does invoice factoring bring to a small business? All businesses run on cash flow, and they all have operating costs like equipment and supplies, insurance, renovations, and expansion costs.
Invoice factoring may not work for all businesses. However, in an industry like construction, where a few invoices can equate to large outstanding amounts, invoice factoring companies provide cash flow opportunities that favour growth.
Construction businesses also need access to capital to take advantage of situations like the following:
Working to deadlines: Clients can be demanding and often ask construction companies to work to unreasonable deadlines. If a project looks like it will go over the projected timeline, access to cash from an outstanding invoice can help with overtime penalty rates or bringing on extra staff.
A slowing economy: The construction industry is always one of the first to experience a downturn in activity when the economy slumps. An injection of cash can often mean the difference between closing shop or making it through the downturn.
Help with slow-paying clients: Even the most reliable clients can have bad months that make them slow in paying. A large sum from an outstanding invoice will make it challenging to meet the many operational costs of running a construction company.
Take advantage of new opportunities: Outstanding invoices can add up to a significant sum and make it difficult to take on new jobs. A lack of working capital often means a construction company cannot take on new jobs that pass over their desk because there are not enough funds to get them started.
No need to worry about collecting: Managing collections from slow payers can be an unproductive use of your time. By taking advantage of small business invoice factoring, you lose the headache of chasing down customers yourself. Plus, you already have access to most of the funds they owe (minus the invoice factoring rates). The availability of invoice factoring companies provides an affordable means for construction companies to meet their financial obligations, grow their business, or take on new projects.
Are There Any Cons to Construction Invoice Factoring?
Construction invoice factoring is a fantastic tool for managing cash flow, but there are inherent risks to prepare for and be aware of.
The main disadvantage of invoice factoring is that you do not get access to the full value of the invoice because of invoice factoring costs. However, greater control over your cash flow and freeing yourself to do more productive tasks are often worth the offset.
Another downside is that the invoice factoring company will be in contact with your clients., making your clients aware that your business has used factoring finance. You also lose control over the collection strategies.
The above are valid concerns that can be mitigated when you choose to partner with a reputable construction invoice factoring company that has your organisations best interests at heart.
The Best Construction Factoring Companies
Due to the nature of construction industry finances – large sum invoices and slow turnover – it can be tough finding quality construction invoice factoring in the UK. Most factoring companies view the construction industry as one where small business construction firms don’t get paid quickly enough to warrant short term financing.
You will only find a handful of construction invoice factoring companies throughout the UK because let’s face it; factoring is one of the most short-term financing options available.
Don’t lose hope because one of the best invoice factoring companies, Ignite Business Group, is ready and willing to help your company with small business invoice factoring.