Taking the Uncertainty Out of Accounts Receivables

Featured Financing
June 3, 2022

For contractors, particularly trade contractors, managing cash flow can be a test in patience, particularly when it comes to accounts receivable (A/R). A/R funds are an asset, money earned from completed work, and yet, largely inaccessible for varying lengths of time until invoices are actually paid. 

How can you take advantage of this essential asset and more consistently manage cash flow? The simple answer is to reduce the time of payment. 

The familiar cash balance sheet has ebbs and flows that can make it difficult to make payroll, pay expenses, manage credit positions and grow your business. In Figure 1 for instance, this contractor is headed to some cash flow dips (red line) in the busy summer construction months of June, July and August. Evening out those dips could be costly as the conventional option is credit financing or loans.

Figure 1: Cash flow comparison


Receivables financing provides a more flexible option. An Early Pay Program (EPP) is an affordable way for subcontractors to leverage an owner or general contractor’s credit position to get paid faster. Once your invoice is accepted by the general contractor, it is paid through EPP immediately. No more 30, 60 or 90 waiting periods.

Here’s how it might work. Using Figure 1 as an example, this contractor has around $2 million in cash available to put towards new work. However, during this contractor’s busiest months, June-August, that available cash has disappeared, going toward payroll, materials and supplies, equipment, etc. He has no money left to bid on new projects. Using Constrafor’s EPP, this contractor can take advantage of off-balance sheet financing, namely receivables, to even out the cash flow throughout the year (green line). The contractor can use the EPP to accelerate payment of some or all of the invoiced amount.  

An EPP can also reduce traditional financing, diminish financial stress and help subcontractors better manage working capital. Much like the example in Figure 1, off-balance sheet financing can reduce the need for costly bank loans or letters of credit. With EPP, a contractor has near immediate access to receivables to smooth out cash flow. 

In these times of uncertainty, with inflation rising, a balanced cash flow could mean the difference between success and failure. 

To learn more about Constrafor’s financial services visit https://www.constrafor.com/landing/subcontractors/ or schedule time with an EPP expert here