Get Your Money Off the Bench

by: Smith and Howard

April 28, 2014

Back to Resources

For contractors, obtaining prompt payment upon completion can be difficult. Privately held construction companies in the United States waited 56 days for payment in 2013, according to financial analysts Sageworks. That’s more than 20% higher than all other private U.S. companies. This also marked a three-year high in 2013 — up from 54 days in 2012 and 52 days in 2011.

Such long payment times are, unfortunately and increasingly, the norm. Under the right circumstances, however, a variety of financial solutions are available to remedy uneven cash flow situations, invest in expansion or pay off debt.

Take out a loan

Along with equipment and property, unpaid invoices can provide banks with collateral for a line of credit. This form of secured borrowing is typically an ongoing arrangement that allows a construction company to leverage receivables from the moment they’re issued.

Banks and other financial institutions typically charge both fees and interest for securitized receivables, which remain an asset of the borrower. These invoice-financing arrangements may provide immediate loans for up to 90% of the value of an outstanding debt and are typically paid back when the customer pays its bill. Each financial institution sets its own rates and conditions for these loans, which often depend on criteria such as your:

Overall financial situation,

  • Customer mix,
  • Annual revenues, and
  • Collection history.

For example, a 30-year-old electrical contracting company with $10 million in annual revenue had difficulty making payroll after two of its large clients waited 90 days to pay outstanding invoices.

Looking to prevent this cash flow crunch in the future, the contractor met with a local banker, who was able to extend the firm a $180,000 line of credit at a competitive interest rate. To secure the loan, the company was required to put up $200,000 in unpaid invoices as collateral and then pay back the loan, plus fees and interest, once customers remitted payments.

Try factoring

Another option for construction firms looking to ease their cash flow is the sale of unpaid — but not yet delinquent — invoices to financial firms specializing in accounts receivable “factoring.” Rather than obtaining a short-term loan for unpaid invoices, factoring allows construction companies (and other types of businesses) to receive an immediate cash payment through the sale of the receivable to a third party.

Costs associated with receivables factoring can be much higher than those for collateral-based loans or other forms of traditional commercial bank financing. What’s more, factoring providers likely will closely scrutinize the creditworthiness of your customers. Still, particularly for smaller construction companies, selling receivables for upfront cash may be advantageous because it reduces the burden on accounting staff and saves time.

For instance, over many years, a 10-person residential plumbing business faced cash flow issues because many of its smaller clients paid their bills between 60 and 90 days after issuance. As a result, the company’s owner routinely used a high-interest-rate credit card to make payroll and spent at least five days a month chasing down late bills. Two years ago, the business began selling off roughly $200,000 of its annual receivables to an online factoring firm.

In the end, factoring saved the plumber about 1,000 combined personnel hours annually and unnecessarily high-interest credit card payments, while considerably easing cash flow concerns.

Play ball!

With baseball season fast approaching, you might think monetizing your receivables as a particularly useful bench player. Getting it into the game at just the right time could drive in some winning dollars. But there are also major risks if you over rely on these strategies or deploy them at the wrong time. Work with your financial advisor to determine precisely in what inning to make the call.

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