Construction Accounts Receivable Financing: Turn Receivables into Cash

Last Updated on January 8, 2020

According to the 2019 Construction Payments Report from Rabbet, slow and floating payments cost the construction industry $64 billion in 2019. Why?

While waiting on payments, contractors have to slow progress, or stop working on projects altogether. A lack of cash makes it difficult to pick up new jobs. Unfortunately, subcontractors don’t get paid on time either. Repeated delays can cause customers to question a contractor’s reliability. 

The resulting loss of work can have a negative effect on cash flow.

30% of companies wait over 60 days to get paid and some contractors deal with outstanding payments 77 days after issuing invoices. For this reason, the construction industry needs a way to ensure reliable cash flow. 

Accounts receivable financing can ease the burden of the late payment epidemic by turning outstanding invoices into usable capital. 

construction accounts receivable financing

How Construction Accounts Receivable Financing Works

The top three challenges for construction companies waiting for cash from receivables are: 

  • Making payroll
  • Investing in growth
  • Taking on projects

Many business owners attempt to cover these costs with business savings and credit. While this may fix the immediate problem, it can cause trouble in other areas. If receivables remain outstanding, little or no cash is available to put toward other business expenses. 

Account receivable financing offers an alternative. 

Instead of pulling money from critical areas of your business, you have the option of receiving an advance for which receivables act as collateral. 

After submitting your invoices, you receive a percentage of the total invoice amount up front and the rest later, minus fees, when customers pay.

Depending on the lender, you may finance some or all of your receivables and get between 70-90% of the total value at the time of funding. 

Fees are calculated as a percentage of the total over the time it takes customers to pay. Average fees range from 2-4% per month. 

When payment is received, the lender automatically deducts the appropriate fee amount before forwarding the remaining balance. 

Receivables financing is best for: 

  • Boosting cash flow during slow seasons
  • Covering employee and subcontractor payroll
  • Getting the money necessary to finish large jobs
  • Accessing capital to invest in growth 

As an added bonus, the structure of this type of funding means you don’t have to add any debt to your balance sheet. You’re already expecting the cash; financing just puts it in your account sooner.

Qualifying for Accounts Receivable Financing

If you’ve tried to get funding for your construction business through the wrong channels in the past, you already know how difficult the process can be. 

Construction invoice financing is often easier to qualify for because receivables provide the lender with reliable collateral. This reduces the level of risk.

Qualification requirements vary, but most lenders look at: 

  • Age of receivables
  • Quality of receivables
  • Creditworthiness of customers
  • Your business and personal credit score 

These factors show how likely you are to pay on time, and provide information about your payment and collection history. 

Financing newer receivables gives you a better chance of qualifying than utilizing older receivables. Having a favorable receivables-to-sales ratio and a history clear of bad debts can help, too. 

Lenders may request financial documents, in addition to your receivables and application, to verify your company’s fiscal standing.

Managing Receivables: Get Paid on Time

Although receivables financing provides quick access to cash, the best way to keep your construction budget balanced is to establish a strategic invoicing and collections policy. This should include: 

  • Terms on which you’ll extend credit
  •  Steps in the collection process
  • How you’ll deal with delinquent customers

When creating your policy, look at your ratio of receivables to sales, your days sale outstanding (DSO) and average time to collection. 

This should give you a good idea of where your cash flow issues are. You can address these directly with stricter rules for enforcement, like charging fees on late payments or requiring customers to pay a portion of their invoices up front. 

Most contractors don’t implement these policies, and wind up negotiating terms as due dates pass without payment. Avoid making the same mistake; do your due diligence before taking on any job. 

One easy way to do this is checking customers’ credit and payment histories. Also, consider how different parties involved in the job could affect your payment timeline. 

Finally, assess your approach to invoicing. 

Don’t give customers any reason to wait to pay or dispute their invoices. Remove barriers to payment by redesigning invoices to include clear details and offering additional payment options. 

Send invoices promptly, and follow up as due dates approach. Invoicing software automates this process, allowing you to send reminders at customized intervals to facilitate faster payment. 

Accounts Receivable Financing for Your Construction Company

It’s time to take control of your receivables and stop struggling with cash flow problems. Receivables financing can provide working capital to support your construction company as you make changes to your invoicing and collections policies. Receivables can also provide the infusion of cash you need to bid on a lucrative job and grow your company.

Accounts receivable financing from National Business Capital & Services turns your receivables into a revolving credit line of up to $5 million. 

You choose how many receivables to finance, and National does the rest! You can access financing in as little as 2-5 days, and get back to focusing on driving revenue. 

Ready to get started? Apply now to learn your options today, and get your cash flow back on track!

National Business Capital & Services is the #1 FinTech marketplace offering small business loans and services. Harnessing the power of smart technology and even smarter people, we’ve streamlined the approval process to secure over $1 billion in financing for small business owners to date.

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About the Author, Matt Carrigan

Matt Carrigan is the Content Writer at National Business Capital & Services. He loves spending every day creating content to educate business owners across every industry about business growth strategies, and how they can access the funding they need!

Disclaimer: The information and insights in this article are provided for informational purposes only, and do not constitute financial, legal, tax, business or personal advise from National Business Capital & Services and the author. Do no rely on this information as advice and please consult with your financial advisor, accountant and/or attorney before making any decisions. If you rely solely in this information it is at your own risk. The information is true and accurate to the best of our knowledge, but there maybe errors, omissions, or mistakes.