No need to take credit for building investments.
Most of building investments are financed with bank credits. However, it is not the only and the fastest way of executing great enterprises. Factoring services become more and more popular among investors and sub-contractors. What is it about? When to use it? Traditionally, ‘the devil is in the detail’.
Companies performing various types of building works very often encounter problems with their financial liquidity. It results from the specificity of construction industry: they have to wait for their remuneration for performed works for long. They must also incur considerable costs beforehand. Additionally, many services are of seasonal character and high costs must be incurred for the maintenance of machinery and tools. Taking into account the foregoing, entrepreneurs actually make use of bank credits on an ongoing basis. Unfortunately, their debts constitute their everyday life, which – consequently – translates into lower quality of completed works and difficult relations with subcontractors and suppliers of materials. However, there are solutions that may considerably improve current situation of companies from the building sector. One of them is factoring, i.e. a solution alternative to bank credits, which may ensure permanent working assets for a company. It also plays preventive role towards possible non-settlement of receivables on part of insolvent counterparties.
Who can make use of factoring?
Factoring is a service intended for a wide group of entrepreneurs, also those who cannot count on funds from banks, because they have no credit history or have incurred a loss. It is possible thanks to the fact that a factor assesses a financial and legal situation both of the factorer and its customers. Consequently, companies facing difficult financial situation, but cooperating with favourably assessed customers, may get funds. In such circumstances, factoring enables development, ensures opportunity to overcome temporary problems and win new customers.
How does it look like in practice?
There are, at least, three parties in such undertaking – a factor (party granting funds), a construction company (factorer, who performs building works) and factorer customers (factoring debtors). A financial institution acquires claims for invoice payment from the enterprise, in the form of an assignment. The corresponding funds are charged onto the company’s account in a few days.
Essential issue of profitability
The basic task of factoring is to increase financial liquidity. That is why this alternative way of funds raising may be a good solution or entrepreneurs performing construction works or granting a trade credit (i.e. issuing invoices with deferred maturity dates), who care about improving their creditworthiness. The Factor makes quickly a decision on granting the funds, applying simplified procedures. Conventionally, factors expect the entrepreneur to provide an agreement binding it with the investor or the party ordering performance of works, invoices, acceptance protocols and financial documents of the entrepreneur and factoring customer (if the entrepreneur such has got documents). The time required for the factor to analyse the documents and make decision is about 5 days. Upon expiration of the said period, our company has a relevant level of financing granted. The whole procedure is performed once, at the beginning of the cooperation. We can use the funds upon provision of all the documents. We receive them, maximally, three days after the invoice was presented.
Who will grant the funds?
The difficulty entrepreneurs performing construction works may face may be finding the entity which is going to grant funds. In the opinion of most of the factors operating on the market, construction industry is a difficult sector, with increased risk, due to the possibility to file complaints, guarantee deposits and other bases to make deductions. For that reason, a vast number of factors do not finance invoices issued for construction works. However, there are some factors who provide their offer also for this sector.
The sooner the better
A construction company may start cooperation with a factor upon signing a contract with investor or even at the stage of its negotiation. A factorer with no external financing aften may be not able to perform the contract. In such situation, it is advisable to start cooperation with a factor when the contract is negotiated. It may not only ensure financing, but also – as the professional – assist in analysing provisions of the contract and suggest provisions and solutions favourable for us. Moreover, it may verify financial and legal situation of the customer, assessing the risk of possible insolvency. When the risk is significant, it will be justified to resign from signing the contract.
Standard does not mean the same
A rule in the construction industry is to render non-recourse factoring services, i.e. non-assumption of risk concerning customer’s insolvency by the factor. Regardless of whether some of them have got specialised debt collection units and effectively recovering receivables from customers. One of the most important issues while choosing a factor are the applied procedures, when the customer does not make payment on the maturity date state din the invoice. It is essential for the factor in such situation to strive for recovering receivables from the customer, instead of immediately filing a counter-claim to us.
We can receive many additional services within the framework of the factoring. Among these we may mention: assistance in negotiating contract provisions, checking the customer’s financial standing, assistance in recovering receivables, receivables monitoring, periodical control of the customer’s situation, even legal aid. Some factors are eager to pay advances towards future, i.e. non-issued invoices. It enables us to purchase materials or appliances necessary to start performing the contract.
Published on: 14 November 2016