The Biggest Hurdle for Contractors & Sub-Contractors
Cash for your Construction Business?
by Robert Birmingham

Where are you going to get it?
It's a great feeling when you get a big contract for a major construction site. But it also comes with its problems. The biggest problem is cash flow. For many contractors and subcontractors, the toughest part of any business relationship large or small, is getting the company to pay its invoices before 60 or 90 days. The reason is quite simple: the longer some of these monster corporations keep their money in the bank, the more money they make on that money. Therefore, the small business person usually winds up financing the operations of the bigger client, which in turn creates a struggle for these contractors and subcontractors.

So what's the solution? For growing number of contractors and subcontractors, factoring offers a solution to this serious problem. Factoring is the fast track to the cash needed to keep your business going and growing. Factoring is now becoming popular in the construction industry; this wasn't the case a short while ago. Factoring truly is on the rise. Factors have collected over $325 billion worth of bills in 2004 up over 400% from 1998.

So how does factoring worked you might ask. Let me explain: special firms known as factoring companies take on the responsibility for collecting bills from your most credit worthy customers. In the construction industry they typically give you $.60 on a dollar or 60% of the invoices or what might be called ?progress billing? up front. Then the factor collects the balance preferably within 30 days and pays you the difference between the 60% and 100%, less a small fee. The fees typically range between 2% and 5%.

Factoring may sound like an expensive way to raise capital, but in reality it's quite inexpensive. You see if you were to factor all your invoices at 3% per month for one year, the total percentage, or, the cost of that money is still only 3%. Because factoring is not a loan, but is the purchase of progress billing or invoices, interest is not compounded. Unlike banks, factors will not look at your business plan or your personal credit rating. Factors do not care how large or small you are. What they do care about, is the customers you are doing business with. Typically once you have set yourself up with a factor, usually in 24 to 48 hours you can be funded, that?s cash deposited directly into your bank account for the life of the project. 

So let me give you an example; A large Knitting Mill in New York, that manufactures sweaters, typically turned out over $9 million in sales every year. This company started factoring their bills in the 1980s and then quit factoring in 1998 when a major bank gave them a $1 million line of credit with a better interest rate than the factor. Six months later the bank rescinded its offer. So the Knitting Mill, went back to factoring, building a relationship with the factoring company for many years after. What the Mill owner expressed was, whenever we had a question, the answer was literally minutes away. The Mill owner also learned that factoring his invoices has allowed them to increase their production and sales by over 20% in just two years.

Believe it or not some bankers are actually sending their clients to factors. You see banks have decided it is in their best interest to help their clients with their business growth needs. The fact is many times, the banks guidelines restrict their clients from getting the money they need to grow their business. So the banks would send these clients to factors.

So what are the drawbacks? A contractor or subcontractor really needs to find a reputable factoring company. A factoring company that stands on integrity, and runs its business the way the contractor or subcontractor would run his own business. 

There are many new players in factoring these days not all of them are good. So be warned, and be careful when choosing a factor. Robert Birmingham is owner and broker at Coastal Funding. Coastal Funding specializes in ?Factoring for the Construction Industry?. www.mycontractorfunding.com

Company Name: Coastal Funding
Author: Robert Birmingham
E-Mail: rbirmingham@bellsouth.net
Address: 5070 SE Lisbon Circle
City: Stuart
State: Fl
Zip: 34997
Voice 772-215-8269
Fax 772-223-2126