The Capital for Businesses Series # 3 – Contrator Finance

The Capital for Businesses Series # 3 – Contractor Finance
By Barry Wolfe CPA, CVA, MBA
January 14, 2014

Contractors have unique issues when it comes to financing their working capital.  As service businesses they often collect for their time and materials at the completion of jobs, thus they are out of pocket for significant costs, such as labor and materials, before they can invoice. If a contractor lacks sufficient funds to acquire materials to commence a project, they might be forced to turn the work down.  Yes, deposits can help, but competition may eliminate customer willingness to fund a deposit. Yes, a contractor can issue progress billings, however, the contractor cannot stop work waiting for the progress billing invoice to be paid. Thus, unless the contractor has its own capital to fund the costs of a project, it needs a financing solution.

The answer is Contractor Factoring. Factoring companies will “purchase” the contractor’s invoices in return for cash which the contractor can use to pay for materials and labor on the job. Generally, the Factor will advance 70 to 80 percent of the invoice amount and remit the remainder (less the Factor’s fee) when the invoice is paid by the contractor’s customer. With the contractor no longer having the burden of collecting invoices to fund its work, they can focus on completing their jobs and servicing and/or prospecting new customers.

The Factor provides other benefits.  For example they will credit check prospective customers and will not factor poor credits risks, thus helping the contractor avoid collection problems.  Factors can also manage the collection process, and as professionals in collections, they can speed up payments. The result is improved cash flow and reduced financing costs for contractors and others who use factoring as a financing tool.

Some of the types of contractors that can be financed are: Architects, asphalt companies, cable companies, carpenters, carpet installers, ceiling/drywall, electrical contractors, engineers, excavators, fire sprinkler contractors, flooring installers, general contractors, HVAC, landscapers, manufacturers, paving, plumbing, roofing, material suppliers, tile contractors, utility contractors and others.

For further information, please contact Vision Economics, 805-9897-7322, or Barry Wolfe directly at 805-217-8278.

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