The Unique Problems of Construction Factoring (And How to Solve Them)

Construction factoring can be every bit as tricky to navigate as it is lucrative.

Ask a factor what industries they can fund, and nine times out of ten they are going to claim they can fund almost everything under the sun – everything, of course, except one little pesky industry: Construction.

Construction Factoring Challenges

On the surface, the construction industry appears to be well suited for factoring. Construction companies and contractors often struggle with cash flow due to slow payment and invoices piling up, but need cash to accept or continue with new projects. Factoring those invoices seems an ideal way for those contractors to keep up with their material and labor costs, resulting in the freedom to take any job that comes their way.

Why, then, are most factoring companies afraid to touch this market?

Most factors steer clear of construction deals because of the complex problems and red tape that the mechanic’s lien law and progress billing bring.

Mechanic’s Liens

Mechanic’s liens, also known as construction liens, refer to a claim on a property for those who worked to improve it- i.e., from the guy who conceptually designed the avant-garde new building to the person who installs the fish shaped doorknobs. Liens secure the right to payment for all entities involved.

In a large project, lots of different trades are involved. For example, the construction company hired to complete a project hires contractors, who hire sub-contractors to complete all the details. Payment trickles down throughout the project.

What happens then, for example, if the subcontractor who installs the door knobs doesn’t get paid? The “little guys” at the bottom don’t want to get stiffed, so they can place a mechanic’s lien at this point, stalling the whole process. To free up the project, the project owner must make sure the door knob installer gets paid.

The problem for factors is that there is often no clear warning ahead of time, such as bad credit. The factor receives a nasty surprise when the client is forced to pay off a subcontractor instead of the factor. The factor involved is left high and dry. This is why most factoring firms will avoid construction headaches.

Progress Billing

Another reason factors avoid construction is progress billing, which is a series of invoices prepared at different stages of a project; each seeking payment for a percentage of the work done. This is common in the construction industry. Contractors can’t wait for payment because they need money to cover material and labor costs in order to get the project done.

Progress billing puts factors at high risk- they could be giving money to clients from invoices that are essentially worthless if the whole project is not completed.

The Factoring Solution

Construction factoring can be every bit as tricky to navigate as it is lucrative. Only a rare few niche factors dare to fund in this area: It really takes an expert who specializes in both factoring and knows the ins and outs of the construction industry.

It’s a wise business practice to refer construction leads to factors who have the expertise to handle the deal right the first time. If you already have a relationship with a construction factor, great- but what happens when you don’t? You can waste a lot of precious time and effort scrambling to find a good factor, or referring to a generalist who eventually turns the lead away.

The best place to turn when looking for specialty factors is a large national factoring broker. Factoring brokers know the capabilities and funding capacity of each of their factors, so you can rest assured that a factorable deal will get funded. Those brokers with the largest networks have the most options to turn to for prospects with particular needs.

Rather than forgo a commission because you can’t identify the best funding sources, the smarter option is to work with a larger broker in a ‘co-brokering arrangement’. You will share commissions, but get the deal funded. The larger broker can tap their network and do the work to get the deal funded. Partnering with a broker such as Factor Finders can expand your options exponentially, and works to the benefit of all parties involved.

Don’t let construction prospects go just because you can’t fund them yourself or find a factor; utilize your network and see what kind of relationship you can build.

About the Author: Factor Finders specializes in finding factoring companies that can fund difficult-to-place deals. Our services help other factoring brokers capitalize on commissions that might otherwise be lost.

If you have a prospective transaction that you cannot find a funder then contact us at FactorFinders.com.  We’ll find the factor for you and split commissions 50-50.