Invoice Factoring for Subcontractors Finance Articles | September 21 Cheap Jerseys China , 2007
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Invoice Factoring for Subcontractors explores the pros andcons of factoring invoices in the construction industry. The article examineshow to determine if it is prudent to accelerate your cash flow with factoring becauseyour subcontracting business is growing rapidly, and no other sources offinancing are available.
If you own a subcontracting business your general contractornormally will pay invoices in 30 to 60 days. This creates a lack of liquiditybecause your cash flow is on hold for that period of time. This may preventgrowth and create difficulties regarding making timely payments to suppliersand your staff. Factoring invoices is a way to accelerate cash flow frominvoices by selling them at a discount to a commercial finance company.
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The term ''subcontractor'' means any person, partnership, orcorporation engaged in building construction and who, pursuant to asubcontractor agreement Cheap Jerseys , customarily furnishes labor, materials or services,for a building or structure?s construction to a general contractor. The list ofsubcontractor categories includes: carpentry, communications, concrete Wholesale Nike NFL Jerseys , doors,drywall, electrical, environmental services, excavating Wholesale NFL Jerseys , flooring, fireprotection, glass, HVAC, insulation Wholesale Jerseys From China , masonry, mechanical, painting, plumbing,roofing Wholesale Jerseys China , waterproofing and demolition.
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General contractors bid on jobs to make a profit. They hiresubcontractors generally with competitive bidding to make the most profitpossible. ?This puts the subcontractor ina challenging environment. The greater the competition, all other things beingequal, their bid price will determine whether or not they win the contract. Thissqueezes profit margins of subcontractors. Once the job begins, thesubcontractor must pay for materials and labor for a considerable period oftime, 30 to 60 days or more before payment is tendered for their work.
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When a subcontractor factors their invoices they are sellingtheir right to be paid from the general contractor to a commercial financecompany. Factoring invoices accelerates cash flow to pay for labor andmaterials without waiting for the general contractor to be paid. Approximately75% of the subcontractor?s invoice will be advanced Wholesale Jerseys , less any retentions orsetoffs. When the general contactor eventually pays the invoice the funds willgo the commercial finance company. They will deduct their fees and rebate thedifference to the subcontractor.
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Invoice factoring for subcontractors makes economic sensewhen they are able to factor invoices profitably as a part of their cost ofdoing business. For instance, the owner of a rock quarry bid jobs to providegranite rock to highway construction general contractors with the estimatedcost of financing always built into the bid.?This allowed his company to grow profitably. In comparison, a paintingcontractor competing with many other bidders might have a gross profit marginthat will not support the extra expense of the financing. Subcontractors must?do the math? before they consider entering into an accounts receivablefinancing contract.
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Invoice factoring, which is also commonly called accountsreceivable financing, is more complicated for subcontractors than factoringinvoices in the manufacturing or staffing industries. First Cheap Nike NFL Jerseys , the generalcontractor must agree to cooperate with the commercial finance company. And theterms of the general contractor?s contract with the owner, especially publicentities, might not allow the invoice factoring to occur. Every invoice to befunded must be verified by the general contractor in writing. There are alsoissues with mechanics lien laws. This requires subcontractors to pay theirmajor suppliers from the advance or to obtain lien releases as a conditionprecedent for the advance from the commercial finance company.
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Discounts from suppliers can help to offset the costs offinancing. The cost of financing is the critical issue to be determined andnegotiated. When a subcontractor signs an agreement to factor invoices, thereis a blanket UCC-1 lien on all of their invoices. And all of their invoices andcash flow will go the commercial finance company whether or not the invoice hasbeen ?sold?. Therefore it is critical to understand and agree that the terms ofthe contract are reasonable and acceptable; this involves analysis of allcontractual provisions besides the nominal price of the financing.
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In this author?s article, Financial Myths vs. FinancialFacts there is an extensive discussion of the myriad ways that price may bedetermined. It pays to read the contract provisions carefully; the nominal priceis only one consideration. How fees are determined Cheap Kids NFL Jerseys , the term of the contract, earlytermination fees, what is the rate charged if there is a default or a dispute-these are just a few of the items to consider. Choice of law is anotherimportant consideration. Is the proposed contract pursuant to the law of thestate you are doing business in or is it pursuant to the law of a state manythousands of miles away from your headquarters?
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The bottom line: Invoice factoring for subcontractors makessense when the cost of factoring invoices makes the entrepreneur moreprofitable. Reading the fine print of the contract is essential to thisdecision.
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