How to Finance a Demolition Company With Construction Factoring

Getting financing for a company in the construction industry is very difficult. In general, lending institutions are not comfortable providing business financing to small or midsized construction subcontractors. Demolition companies often have additional problems getting funded because many institutional lenders view them as riskier – due to the perception that they are often the first ones to do work on a site, but the last ones to get paid.

The biggest cash flow problem

Demolition companies, like most subcontractors, don’t get paid as soon as they complete their work. Rather, their contracts demand that the provide payment terms to the general contractor. These terms often give the GC up to 60 days to pay. Many general contractors, who often have their often cash flow problems, can take longer to pay. This makes things worse.

Slow payments create problems for obvious reasons. You need money to pay your employees, handle equipment payments and to run your business. Slow payments can create a cash flow crunch, forcing you juggle expenses. And if the situation gets out of hand, the business could get into an irreversible tailspin. This happens all too often.

Many of these problems can be solved by financing your construction receivables.

The solution – construction factoring

Factoring your invoices provides a simple way to improve your cash flow. This allows you to focus your efforts into running – and growing – your business.

The solution is pretty simple. You work with a company that finances your open invoices from commercially creditworthy general contractors. Instead of waiting up to two months for payment, you get immediate payments from the factor. The factor holds the invoice until your client pays and then settles the transaction. You can repeat this financing process every month, ensuring you have cash for payroll and other expenses.

Easier to get than bank financing

Getting factoring financing is easier than getting conventional bank financing. That does not mean that any demolition company can get it – you still have to qualify for it.

It’s important that your general contractor have good commercial credit, because the factor is financing the invoice based on that. This can sometimes be a challenge because many midsized GC’s don’t have good commercial credit. Also, your invoices should also be free of liens, encumbrances and other issues.

Retainage

If your general contractor keeps a portion of your payments as retainage (often 10%) the factoring transaction will become a little more complex. The finance company will need to subtract the retainage component when deciding how to finance the invoice. This is because retainage is often paid at the end of the project, which can take months or longer to pay.

Pay when paid – a deal killer

Many construction agreements have a pay when paid clause, which allows the general contractor to pay you if and when the end client pays. Unfortunately, invoices subject to this clause are not factorable because there is the risk that you could complete your work and still not get paid due to end client issues.

The only way to finance an invoice that is subject to this clause is to have the general contractor waive this clause and agree to pay on standard commercial terms.

Will factoring help your demolition company?

Construction factoring offers a very good alternative if your demolition company has a very specific issue – cash flow problems because you can’t afford to wait up to 60 days to get paid by your GC’s. If your company has this problem, then financing invoices will allow you stabilize your working capital and allow you to grow.

About Marco Terry

Marco Terry is the managing director of Commercial Capital LLC and Commercial Capital LLC (Canada), a leading factoring and purchase order financing intermediary. He can be reached at (877) 300 3258.