Construction Factoring: Cash Flow Fix
The construction industry is facing many changes. Lack of control over cash flow has significantly contributed to high insolvency rates in the industry, specifically among small businesses with limited capital. In most occasions, contractors don’t go out of business because they run out of work, they go out of business because they run out of money.
Unstable cash flow can lead to bankruptcy within two years
Studies have shown that firms lacking a stable association between the three components of cash flow: operations, financing activities, and investing, are out of business within two years.
So, where is the cash? Unfortunately, for some companies funding is completely dependent on slow paying invoices. Lack of control over clients who are slow players creates lags between billing and collection of receivables. It’s very challenging for contractors to keep enough cash on hand while there are many demands on the cash at the same time. Capital for payroll, purchases of materials, and payments to subcontractors are hindered when cash flows are uncertain.
Taking control with cash flow planning
Forecasting cash flows is not an exact science, but thoughtful planning can help companies make insightful decisions regarding budgeting, financing, capital expenditures, compensation and growth. Even if a construction company has a good idea of what its funding needs are, it’s not always possible to get the funds when needed. The cash flow uncertainty further complicates getting financing from traditional lenders. For many contractors, specialized financing, such as construction factoring offered by Cultiva Financial, can help ensure that funds are available when they are needed most.
Construction factoring versus traditional loans
A standard loan provider may ask companies to prove years of positive cash flow before they will even consider lending money, making it hard for start-ups to get access to credit.
Without working capital, contractors with challenging credit histories have limited options.
When banks are hesitant to lend, construction factoring has proven to be a fast and easy solution.
Factoring is a process where a company sells some or all of its unpaid invoices to a finance company known as a “factor”. In exchange, the construction company gets funds on its invoices right away to cover key project expenses. Construction factoring helps contractors overcome the challenges of getting credit because it focuses more on the creditworthiness of their clients.
If they have good clients, they have an excellent chance to receive capital through specialized financers like Cultiva Financial.