Paying employers and suppliers on time is a major concern for small roofing companies. However, making timely payments can be difficult because commercial clients and general contractors (GCs) pay invoices in 30 to 60 days. Offering net payment terms can create cash flow problems for businesses that aren’t well capitalized.
This article explains how construction factoring can improve your roofing company’s cash flow. This solution provides a sustainable financial platform that can help your company grow. We cover:
- Slow-paying commercial invoices?
- Why is getting financing difficult?
- Finance invoices with construction factoring
- Advantages for roofing companies
- Differences with traditional factoring
- Qualification criteria
1. Slow-paying commercial invoices?
Many roofing companies must give 30- to 90-day payment terms to their commercial clients and general contractors. Working with net-30 accounts is a standard in the industry. Commercial clients and GCs expect to get these terms. However, there is another side to this transaction. Offering terms to customers can create cash flow problems for roofing companies that aren’t well funded.
The main management challenge is handling employee and supplier payments. Employees are usually paid weekly, while suppliers often demand quick payments. These expenses are ongoing and must be met. Otherwise, the company will be in trouble.
However, your invoices get paid in 30 to 60 days. The invoice payment usually happens after your company has to pay for expenses. The difference in the timing of expenses and revenues isn’t a problem if your company has an emergency cash reserve. However, it can create serious financial issues for companies that don’t have a reserve, especially if they are growing quickly.
This type of cash flow problem can usually be fixed with a revolving line of financing. However, obtaining funding presents a new set of challenges.
2. Why is getting financing difficult?
Getting conventional financing is difficult for many roofing companies. Few companies can meet the qualification requirements for a line of credit. To qualify, the roofing company must have collateral, a long track record, and comply with lending covenants.
Lending covenants are conditions in a loan that the borrower must fulfill. These include maintaining certain financial ratios, liquidity, net worth, etc. However, most roofing companies have seasonal revenues. Seasonality makes meeting certain covenants more difficult. This difficulty can result in problems with your financing facility.
A business line of credit is usually the best option if you qualify. If you can’t qualify, consider construction factoring. Construction factoring is an alternative that provides similar benefits but is easier to get.
3. Finance invoices with construction factoring
Roofing companies can improve their cash flow by using construction factoring to finance their invoices. Construction factoring is a financing program specific to subcontractors. It provides an advance for slow-paying invoices from commercial clients and GCs. This solution improves your cash flow and provides funds to pay expenses. Construction factoring behaves much like a revolving line, improves your cash flow, and supports future growth.
a) How does construction factoring work?
Most construction factoring lines are not structured as loans. Instead, they are structured as purchases. The roofing company sells its invoices to a factoring company. The factor pays for your invoices in two installments. This structure is important because it has simpler qualification requirements.
Your company gets the first installment shortly after submitting the invoices to the factoring company. It covers 75% to 85% of the invoice and is deposited into your bank account shortly after the invoice is processed.
The factoring company deposits the remaining 15% to 25% as a second installment once your customer pays the invoice in full. The factoring fee is deducted from the second installment. The second installment settles the transaction. Your company can use the facility as often as needed, which provides ongoing financing.
4. Advantages for roofing companies
Construction subcontractor factoring lines have several advantages over other financing solutions. Here are the four most important benefits.
a) Improves cash flow quickly
The main benefit of using construction factoring is that it improves your cash flow quickly. The line can be deployed in a few days as long as there are no major issues.
b) Easier to get than loans
Getting a factoring line is easier than getting a conventional loan. The underwriting process is streamlined. It focuses on the credit quality of your invoices and the reliability of your company.
c) Allows you to offer payment terms to customers
A construction factoring line allows you to offer customers net-30 terms (or longer). The line minimizes cash flow issues.
d) Can increase as your business grows
Factoring lines are linked to your accounts receivable. The line is dynamic and adapts to your revenues as your company grows. Qualifying for a line increase is simple and can usually be done in a day or two.
5. Differences with traditional factoring
Construction factoring programs differ from regular factoring programs in some aspects. These differences include the following:
a) Retainage invoices
Roof construction projects often have a retainage component. The retainage ranges from 5% to 10% of the project and is held back by GCs. The funds are returned at the end of the project. General contractors use the held-back funds to cover any possible work defects. Additionally, retaining funds create an incentive for the roofer to finish the project quickly.
Retainage can have negative consequences for the roofing company. It decreases your cash flow further. Consequently, many roofing companies try to factor their retainage invoices. Unfortunately, retainage invoices can’t be factored. There are two reasons for this.
The first reason is that these invoices often take over 90 days to pay. Factoring companies are unable to finance invoices that go beyond 90 days.
The second reason is that these invoices are often subject to disputes. Disputes can lead to general contractors short-paying the invoices. Consequently, trying to finance these invoices could backfire on your company.
b) Progress invoices
Construction factoring companies can factor progress invoices, which is something most factors won’t do. However, the roofing company needs to show that the work for the progress payment is complete.
c) Pay-when-paid
Some general contractors add a so-called “pay-when-paid” clause to their contracts. This clause increases the risk of late payments or, worse, non-payments. Consider the following scenario. Your company could do everything right and still not be paid because another company didn’t fulfill its obligations.
The only way to finance these invoices is if the general contractor waives the “pay-when-paid” clause. In our experience, there aren’t many GCs willing to waive this clause. They use it to protect their cash flow. However, it is worth a try if you have an excellent relationship with them.
d) Invoice verifications
Factoring companies regularly verify invoices to ensure they are accurate. Verifications for companies in construction are more stringent than those for other industries. The factor may require that your GC or commercial client verify in writing that the work has been accepted. Additionally, any “pay-when-paid” clauses in your invoice will need to be waived.
6. Qualification criteria
Qualifying for construction factoring is easier than qualifying for other solutions. To qualify for factoring, you must meet the following criteria:
- Your invoices should be payable by a creditworthy general contractor or commercial client
- The work – or work segment – must be completed
- Your invoices should be payable in up to 60 days
- Your invoices should not be encumbered by liens
- You must be a direct contractor or a subcontractor for a GC
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