If you own a subcontracting service your general specialist usually will pay invoices in 30 to 60 days. This creates an absence of liquidity because your cash flow is on hold for that amount of time. This might prevent growth and create troubles concerning making timely payments to providers and your staff. Factoring invoices is a way to accelerate cash flow from invoices by selling them at a discount rate to an industrial finance company.
The term ‘subcontractor’ indicates anybody, partnership, or corporation engaged in structure construction and who, pursuant to a subcontractor agreement, customarily provides labor, products or services, for a structure or structure’s construction to a basic specialist. The list of subcontractor classifications includes: carpentry, interactions, concrete, doors, drywall, electrical, ecological services, excavating, floor covering, fire security, glass, HVAC, insulation, masonry, mechanical, painting, pipes, roof, waterproofing and demolition.
General professionals quote on tasks to make a revenue. They work with subcontractors generally with competitive bidding to make the most benefit possible. This puts the subcontractor in a tough environment. The higher the competition, all other things being equal, their quote price will identify whether or not they win the agreement. This squeezes earnings margins of subcontractors. As soon as the task starts, the subcontractor needs to spend for materials and labor for a substantial amount of time, 30 to 60 days or more before payment hurts for their work.
When a subcontractor factors their invoices they are selling their right to be paid from the general specialist to an industrial finance company. Factoring invoices speeds up cash flow to spend for labor and products without waiting for the general contractor to be paid. Roughly 75% of the subcontractor’s invoice will be advanced, less any retentions or setoffs. When the general contractor ultimately pays the invoice the funds will go the business financing company. They will subtract their charges and rebate the difference to the subcontractor.
Invoice factoring for subcontractors makes financial sense when they have the ability to factor invoices beneficially as a part of their expense of working. For example, the owner of a rock quarry bid jobs to offer granite rock to highway building basic professionals with the approximated cost of funding constantly developed into the quote. This allowed his business to grow profitably. In contrast, a painting contractor taking on numerous other bidders might have a gross profit margin that will not support the additional expense of the funding. Subcontractors need to “do the mathematics” before they consider participating in an accounts receivable funding agreement.
Invoice factoring, which is also typically called accounts receivable funding, is more complicated for subcontractors than factoring invoices in the production or staffing industries. First, the basic specialist should consent to cooperate with the business finance business. And the regards to the general professional’s contract with the owner, particularly public entities, might not enable the invoice factoring to take place. Every invoice to be funded should be confirmed by the general professional in composing. There are also concerns with mechanics lien laws. This requires subcontractors to pay their major suppliers from the advance or to acquire lien releases as a condition precedent for the advance from the commercial financing business.
Discount rates from suppliers can help to offset the costs of financing. The cost of financing is the critical concern to be identified and negotiated. When a subcontractor indications an arrangement to element invoices, there is a blanket UCC-1 lien on all of their invoices. And all of their invoices and cash flow will go the business finance business whether or not the invoice has actually been “offered”. For that reason it is critical to understand and agree that the terms of the agreement are reasonable and appropriate; this includes analysis of all contractual provisions besides the nominal price of the financing.
The bottom line: Invoice factoring for subcontractors makes good sense when the cost of factoring invoices makes the entrepreneur more successful. Reading the small print of the contract is important to this choice. American Prudential Capital is one of the best Houston factoring company.