Banks are often reluctant to extend credit to commercial subcontractors because of the industry’s uncertainties. But the lack of working capital can limit the financial flexibility for subcontractors, especially during uncertain economic times.
Commercial subcontractors don’t have to wait for the approval from banks to access the cash they need to sustain their businesses and grow.
Construction factoring provides the capital subcontractors can use to finance payroll, purchase equipment, pay suppliers, cover overhead expenses and compete for larger projects without taking on more debt.
How Construction Factoring Works
Construction factoring can improve the cash flow for subcontractors by converting earned revenue into cash without borrowing more money or raising capital.
First, subcontractors will send a payment application to the factoring company. Then, the factoring company will confirm the status of the work completed with the general contractor (“the customer”) to ensure their satisfaction and approval of the pay app. Next, the factoring company will purchase the pay app and advance a percentage to the subcontractor. At Evergreen Working Capital, we can advance up to 85% of the pay app amount within 24 hours.
Once the payment application is sold, the subcontractor can use the cash generated by the sale to finance business needs. The factoring company will confirm payment instructions with the subcontractor’s customer and follow up on any late payments. That frees up subcontractors to expand their businesses as the factoring company essentially becomes the contractor’s accounts receivable department to ensure that revenue is received for the pay app.
When the customer pays the factoring company, the subcontractor will receive the remaining amount of the pay app minus a small fee. The transparent process means subcontractors avoid getting nickel-and-dimed by hidden fees.
The Benefits of Construction Factoring
The top benefit of construction factoring is subcontractors can get paid immediately for work completed. Slow-paying customers can take 90 days or more to pay. With factoring, subcontractors can deploy the revenue they earn to grow their business swiftly.
A good factoring company should provide more than just access to earned revenue. General contractors can place strict requirements on subcontractors for submitting pay apps, including detailed cost schedules, written change orders, proof of insurance, lien waivers, etc. The factoring company can assist with contract compliance and reduce the time to get paid. At Evergreen, our team will review subcontractors’ payment applications to remove any barriers to collecting revenue and manage liens and vendor payments to reduce the administrative burden on our clients.
Evergreen offers a 6- or 12-month renewable contract, customized to fit a subcontractor’s needs that can adjust according to the business’s growth. Evergreen doesn’t put a cap on how much subcontractors can factor, and they choose which accounts will be factored.
Factoring is a flexible solution that can scale to the level of a subcontractor’s business activity. Since banks are cautious about lending money to subcontractors because of economic uncertainty, construction factoring can provide working capital when other financing options are unavailable. Subcontractors are using the capital of the factoring company to grow their businesses.
Why Use Evergreen Working Capital for Construction Factoring
Evergreen has been working in the factoring industry for more than 20 years. It has a unique combination of financial and operational knowledge that makes the company more than a source of funding; it’s a trusted business adviser for clients.
With an in-house underwriting team, Evergreen can make factoring decisions fast, so subcontractors can finance their operations as needed.
Evergreen can help subcontractors meet their business goals by offering them a comprehensive and fair evaluation of their customers. Evergreen also works with other lenders to provide subcontractors with a full range of financing options. The commercial construction industry is tough enough. Let Evergreen help you convert earned revenue into cash without borrowing more money or raising capital.