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Stories Tagged ‘applications for payment’

There are more and more lenders entering the market of constrction factoring. This should be good news for construction companies and it may well be, however, there are some real potential pitfalls for companies that use this form of finance.

For many construction contractors this form of finance may present a real lifeline and an opportunity to finance growth but it is imperative that you understand how it works and how charges can mount.

One frustration I have is that businesses who are on the fringe of the construction industry can be assisted by more traditional factoring providers. Unfortunately lenders with specialist construction factoring products will ‘force’ these businesses down this route as it reduces their risk, reduces their exposure, increases their fees and ultimately provides a better return for their shareholders. There seems to be little benefit for the business that is ‘forced’ down this route.

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Recently we were approached by a landscape gardener than needed assistance in raising some working capital. The family owned business has issues as they were working for the well known house builders. These clients would take a long time to pay and in the meantime they had to pay their workers weekly.

They had approached their own bank who were unable or unwilling to provide an overdraft facility. They referred them to their invoice finance arm who were unwilling to assist as the business was considered to be in the construction industry as they were required to submit applications for payment to the house builders like any other contractor. From there they had approached several independent invoice finance providers who were unwilling to help for the same reasons. The landscape gardener then approached us at Funding Solutions UK.

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Construction factoring is a topic that we have covered several times on this forum.

It is a sector that struggles to find suitable forms of working capital finance as banks are reluctant to offer overdraft facilities and invoice finance companies are uncomfortable with the risks associated with the construction industry.

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Invoice Finance companies will typically not provide finance to companies in the construction industry that raise applications for payment. However, at Funding Solutions we have been finding finance for such companies from the very outset. Clients of ours include scaffolding firms, tiling contractors, roofing contractors and various other construction related businesses. If you are looking for finance against applications for payment then give us a call.

Part of this is because they cannot actually take assignment of an application as it is not a legal document whereas an invoice is.

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We have several invoice factoring clients who operate in the scaffolding industry. They have always found it difficult to find invoice factoring companies who want to lend to them because of the industry that they operate in. However, as an industry scaffolders require cash flow finance because the house builders are slow to pay yet wages need paying weekly. On top of that funding for tubing is hard to come by and often has to be hired in at high rates or bought for cash which only compound the problem.

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Construction Factoring is challenging for invoice factoring companies for a number of reasons.

Any invoice factoring company wants to know that the value of any invoice that they have funded against is secure. In the event of business failure they want to be able to approach the clients customer and request that the invoices they have taken good title to are paid in order to recover their position.

With this in mind if you consider how the construction industry operates you will see how this can cause issues for invoice finance companies.

In the first instance most contractors within the construction industry raise ‘applications for payment’ rather than invoices. As such invoice factoring companies cannot take good title to the applications in the traditional manner.

The work done is usually measured weekly, monthly or against specific milestones and as such applications or invoices are raised for a part completed project. Should the contractor fail to complete the project then liquidated damages can come into effect which render the outstanding invoices worthless. As such any invoice factoring company would not recover their position against these invoices.

Retentions at the end of the contract can also cause issues for invoice finance companies but these effect the prepayment level rather than the ability to provide funding.

Bad news for the construction contractor looking for a flexible working capital facility? Well, it is not all bad news. Smart Factoring Quotes have lenders who can provide invoice finance facilities to construction contractors. Get in touch today.