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Written by Gregg Elberg
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Thursday, 20 September 2007 |
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Word Count: 856 Invoice Factoring for Subcontractors
If you own a subcontracting business your general contractor normally will
pay invoices in 30 to 60 days. This creates a lack of liquidity because your
cash flow is on hold for that period of time. This may prevent growth and create
difficulties regarding making timely payments to suppliers and your staff.
Factoring invoices is a way to accelerate cash flow from invoices by selling
them at a discount to a commercial finance company.
The term 'subcontractor' means any person, partnership, or corporation engaged
in building construction and who, pursuant to a subcontractor agreement,
customarily furnishes labor, materials or services, for a building or
structure’s construction to a general contractor. The list of subcontractor
categories includes: carpentry, communications, concrete, doors, drywall,
electrical, environmental services, excavating, flooring, fire protection,
glass, HVAC, insulation, masonry, mechanical, painting, plumbing, roofing,
waterproofing and demolition.
General contractors bid on jobs to make a profit. They hire subcontractors
generally with competitive bidding to make the most profit possible. This puts
the subcontractor in a challenging environment. The greater the competition, all
other things being equal, their bid price will determine whether or not they win
the contract. This squeezes profit margins of subcontractors. Once the job
begins, the subcontractor must pay for materials and labor for a considerable
period of time, 30 to 60 days or more before payment is tendered for their work.
When a subcontractor factors their invoices they are selling their right to be
paid from the general contractor to a commercial finance company. Factoring
invoices accelerates cash flow to pay for labor and materials without waiting
for the general contractor to be paid. Approximately 75% of the subcontractor’s
invoice will be advanced, less any retentions or setoffs. When the general
contactor eventually pays the invoice the funds will go the commercial finance
company. They will deduct their fees and rebate the difference to the
subcontractor.
Invoice factoring for subcontractors makes economic sense when they are able to
factor invoices profitably as a part of their cost of doing business. For
instance, the owner of a rock quarry bid jobs to provide granite rock to highway
construction general contractors with the estimated cost of financing always
built into the bid. This allowed his company to grow profitably. In comparison,
a painting contractor competing with many other bidders might have a gross
profit margin that will not support the extra expense of the financing.
Subcontractors must “do the math” before they consider entering into an accounts
receivable financing contract.
Invoice factoring, which is also commonly called accounts receivable financing,
is more complicated for subcontractors than factoring invoices in the
manufacturing or staffing industries. First, the general contractor must agree
to cooperate with the commercial finance company. And the terms of the general
contractor’s contract with the owner, especially public entities, might not
allow the invoice factoring to occur. Every invoice to be funded must be
verified by the general contractor in writing. There are also issues with
mechanics lien laws. This requires subcontractors to pay their major suppliers
from the advance or to obtain lien releases as a condition precedent for the
advance from the commercial finance company.
Discounts from suppliers can help to offset the costs of financing. The cost of
financing is the critical issue to be determined and negotiated. When a
subcontractor signs an agreement to factor invoices, there is a blanket UCC-1
lien on all of their invoices. And all of their invoices and cash flow will go
the commercial finance company whether or not the invoice has been “sold”.
Therefore it is critical to understand and agree that the terms of the contract
are reasonable and acceptable; this involves analysis of all contractual
provisions besides the nominal price of the financing.
In this author’s article, Financial Myths vs. Financial Facts there is an
extensive discussion of the myriad ways that price may be determined. It pays to
read the contract provisions carefully; the nominal price is only one
consideration. How fees are determined, the term of the contract, early
termination 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 another
important consideration. Is the proposed contract pursuant to the law of the
state you are doing business in or is it pursuant to the law of a state many
thousands of miles away from your headquarters?
The bottom line: Invoice factoring for subcontractors makes sense when the cost
of factoring invoices makes the entrepreneur more profitable. Reading the fine
print of the contract is essential to this decision.
Copyright (2007) Gregg Financial Services
www.greggfinancialservices.com
Mr. Elberg is a licensed attorney and licensed real estate broker. Gregg
Financial Services is a full service brokerage for commercial finance companies
and banks that fund B2B businesses. Mr. Elberg arranges funding from $25,000 to
$50 million per month at competitive pricing, and works to reduce your financing
costs as your company grows. For more information about GFS, please call
888-482-9221 or visit our website:
http://www.greggfinancialservices.com
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