Receivables financing, also known as invoice financing, has made a significant comeback in recent years as businesses are now requiring alternative and more efficient capital options.
Invoice financing builds on your company’s biggest asset: your invoices. Typically, when a subcontractor completes work and sends an invoice to a general contractor, the invoice goes through a review, approval and payment process. The average payment in construction takes more than 30 days. With invoice financing, as soon as the invoice is approved, the subcontractor is paid.
Today, receivables financing is utilized by 50% of S&P 500 companies and has become a competitive financing option particularly for SME businesses that deal with a strong credit client. For a subcontractor the advantages range from quick access to working capital to more reliable cash flow. But is it right for you? If you’re looking to expand, win more jobs or need cash for expenditures, then the answer is likely yes.
Invoice financing such as Constrafor’s Early Pay Program (EPP) receivables financing, can be an alternate source of liquidity for large capital expenditures, equipment or inventory purchases, and even M&A activities. EPP can also free up liquidity for larger, capital-intensive projects or capitalize your business without taking on more debt. Finally, EPP can provide instant, affordable cash so you can cover bills, payroll, invest in new equipment, etc.
Like any financial transaction, choosing to develop a receivables financing partner requires a careful evaluation of the pros and cons of this approach for your business as well as a deep dive into your potential financing partner.
Below are our top tips for contractors to consider when developing a successful invoice financing partnership. To learn more about what to avoid when looking for a financing partner, read our post 4 Invoice Financing Red Flags You Need to Know.
3 Factors to Consider When Choosing a Financing Partner
- Construction-First Focus: Make sure your invoice financing partner understands your business. The way general contractors and subcontractors operate is unique in the financial management of materials, resources and personnel over the course of a project.
- Transparency: Carefully evaluate contracts for payment terms, fee rate structures, hidden fees (e.g., interest, termination, maintenance, due diligence) and understand the payment terms.
- Reliability/Financial Security: It goes without saying that before entering any arrangement with a financing partner, a firm should carefully evaluate that business partner’s financials. That’s especially true when considering receivables financing. Investigate the firm’s credit facility.
Bonus Tip #4 Improved AR Processing: While invoice financing can provide transparency and cash flow reliability, it’s also a way to improve your ability to see, monitor and analyze your accounts receivables portfolio, even from different platforms. Managed under one system, contractors can track invoice and billing progress while tracking current and expected cash flow in real-time with Constrafor’s AR Processing.
Receivables financing is a great way to ensure a consistent and reliable cash flow for your business. The underwriting is much less invasive than traditional financing such as loans and it doesn’t affect your credit. However, finding the best financing partner is essential to long-term success.