Can You Use Invoice Factoring for Your Subcontracting Business?

If you keep struggling to maintain cash flow during your projects as a subcontracting business, you should immediately consider invoice factoring as a sensible and immediate solution. It’s very tricky to begin work on a project when you don’t receive payment for a month or several months, but factoring is an easy way to turn that future, stagnant money into liquid finances that you can use to pay for materials and to pay your employees’ salaries.

The invoice factoring process works as follows. You, the subcontracting business, are hired to complete a job. The hiring party then creates an invoice, which states that they will pay you a certain amount of money on a certain date. However, you need to begin work and need to spend money that whole time to pay your fellow contractors and to pay for materials. To get that money, you can sell your invoices to a factoring company. They take a slight percentage of each invoice, but immediately give you cash so that you can get started on your project. Then, when the hiring party finally pays, the money goes to the factoring company.

There are several benefits to invoice factoring, the most obvious of which is the fact that subcontractors can get the liquid finances that they need right away. Also, if your company develops a trusting relationship with a factoring company, you can get more and more money from them, since they won’t be afraid that you’ll do a bad job or that your clients won’t pay. Also, as you find more and more projects, this process can help you expand in a way that would have been too expensive should you have had to wait a long period of time to get the money for the projects you just began.

However, there can be some complications for subcontracting businesses. Since they are in a unique situation and work for other general contractors, the general contractors’ policies apply. For instance, a general contractor will make an agreement with the actual owner of the project, and those terms carry over to the subcontracting company. Sometimes, mechanics lien laws require that subcontractors pay their materials suppliers from an advance that they get for the project and that they can’t factor invoices because the general contractor wants them to only use what is given them up front.

If you’re fortunate enough to be able to start invoice factoring, just make sure that you won’t be losing a significant amount of money and you’ll be relieved at how much this process helps you in your work.