Use of Factoring Co

16 Replies

Has anybody used a factoring company before? I have yet to venture on developers developing tract homes, I have 5 of them in line. Would want to get ahead and see my options on payroll / progress billing factoring. Anyone has experience or can recommend me to shoot my invoices there?

Developers, what is your thought on GC's or trade contractors factoring their invoices?

Thanks for all the insights and help.

I have to ask , what is a factoring company ?

Looked at them briefly, never used them.  They'll look at your client, and their finances, as much as yours.  I believe they want 4-6 pt.s and only fund 70-80%, at best, of approved invoices.  And, I believe they want ALL of your receivables, not just when you want them.  I wouldn't want a developer (private) that far ahead of me.  Almost all my work was gov't. so I knew the funds would be paid, albeit slow.

It is like, if you are waiting for a valid invoice, they give you the cash today and they wait for receivables. This is kind of a niche investing market. For some government contractors, they support you 100% because Government will pay, eventually, only question is when. From what I researched, they are not that supportive for residential areas due to the risk of the owner not paying the factoring companies. Kind of like check re-discounting, but only that the collateral is your invoice.

These are greater returns for investors, they could charge 3-5% for 30/60 days. Some fund 90% some 97%, but I think the going rate for construction is 80%, so for 10,000, I get 8,000 for every approved invoice (usually next day) then when factoring companies get paid (from owner), I get the 1,700 (using 3% factoring charge). They collect the checks in behalf of me, some companies offer they will do the AR department for free.

Originally posted by @Wayne Brooks :

Looked at them briefly, never used them.  They'll look at your client, and their finances, as much as yours.  I believe they want 4-6 pt.s and only fund 70-80%, at best, of approved invoices.  And, I believe they want ALL of your receivables, not just when you want them.  I wouldn't want a developer (private) that far ahead of me.  Almost all my work was gov't. so I knew the funds would be paid, albeit slow.

 I found that some have non recourse and only invoices forwarded, those are for govt sector clients too, it might be really hard for private clients of mine. I am ok with 4-6 and 80 (govt factorers charge 3 and 95), they dont charge up front anyway. I came close to factoring one of the city invoices but i got the payment before the factoring approved. I guess there are more factorers for govt clients because they dont really have a risk of non-payment. I would probably post my PP bond and have a better chance at negotiation than a factoring co, not to mention much cheaper. Or probably 5% private money and first lien holder.

@Manolo D.

you may want to establish credit with a community bank that will give you a LOC to bridge the payment gaps.

I funded a start up flagging companies a few years ago.. they had that issue.. PGE work city work etc.. and of course the flaggers needed to be paid weekly.

Once they had track record they moved to my community bank got a working line of 250k and have been going strong for the last 10 years.

I know here in ORegon professional subs get paid once every 30 days from bank draws. and they usually can bridge their salaries for 30 days.

Originally posted by @Jay Hinrichs :

@Manolo D.

you may want to establish credit with a community bank that will give you a LOC to bridge the payment gaps.

I funded a start up flagging companies a few years ago.. they had that issue.. PGE work city work etc.. and of course the flaggers needed to be paid weekly.

Once they had track record they moved to my community bank got a working line of 250k and have been going strong for the last 10 years.

I know here in ORegon professional subs get paid once every 30 days from bank draws. and they usually can bridge their salaries for 30 days.

Jay, I have not yet explored community banks, it has not yet come to my attention of needing one until recently. With government work, I am not having trouble because I only take what my bonding capacity will allow me (250k) and usually I could fund them, as I take one or two at a time, and while waiting for the bond released, I have project gaps. I am trying to fill in those gaps with residential projects. Capacity wise, I have 90% of the trades covered to self-perform all of them. Company wise, it is still 8 months old, there is not much track yet as I am capped with bonding capacities, I have a couple of commercial contracts, but they aren't that stable of a client. I am trying to look for a solution somewhat like the flagging company you mentioned. I am trying to schedule a sit-down with my suppliers and see if they can help fund my projects, currently, I have a record with them but those are not credit transactions, more like cash before delivery. I am not sure if its wise to use credits with them or just use private money/LOC to fund materials and labor.

I could probably fund the 30 days for 1 project, but until I get paid, I could not take another. I would have a migraine that will reach the moon. OPM would probably be the best option I have. I see a lot of potential works, one developer has 60 townhouses in 4 phases and 15 condos in one 4 buildings. If I get two developers plus my government contracts, that should keep me busy all year round.

The problem hiring professional subs is, their prices are already high, and if I impose paid when paid scenario, the prices are going to be much higher. By that figure, my prices will get killed and the potential profit vs self performing is gone.

Thank you for your insight, it helped me a lot, I will be approaching a local community bank, as well as private money for my future projects.

I am surprised the traction it gave me on this factoring companies, their rates are reasonable, one company charges 2% transaction and 1% a month. I would not want to factor out anything of less than a developer client or as they say commercial or better. I will give this a try, maybe I will get lucky. They have a 250/year minimum, I am not worried if they got my back. I wish there were more lenders like this, they could really make money, but from what I understand there's a lot of risk due to liens and other complicated laws.

I work with several factoring companies and 1-3% is the normal discount range. 

Originally posted by @Rita Bautista :

I work with several factoring companies and 1-3% is the normal discount range. 

 Yes, and lesson learned, they don't do construction, well, most of them, despite the ads "we factor anything under the sun" lol.

@Manolo D,  That's true, but consumer financing is still an option and that is more effective than factoring in that industry.  It accomplishes the same thing which is the improvement of cash flow and it takes the invoicing of clients away from your company.   

Originally posted by @Rita Bautista :

@Manolo D,  That's true, but consumer financing is still an option and that is more effective than factoring in that industry.  It accomplishes the same thing which is the improvement of cash flow and it takes the invoicing of clients away from your company.   

 Haven't been educated on it, I will look it up, for the benefit of the forum/readers, can you post some links where we could educate ourselves about it? I like what I am reading and will definitely shoot you an email. Thank you.

Using a factoring company makes you look bad to your customers. Makes you look "hard up for cash"

I disagree, completely.  A professional factoring company uses your company name on every interaction with the customer.  They actually can make a company look bigger by having an external accounting presence. 

Originally posted by @Joe Cummings :

Using a factoring company makes you look bad to your customers. Makes you look "hard up for cash"

 I have a unique situation, I am looking for a factoring company that can do financing as well for working capital, at the pace that I want to grow, I could not do it alone. I have the skills and the company has the ability, but need the financial push to make it. More on the development side and government contracting, they're not really for real estate. But yes, I would agree with Rita, they aren't that bad, there are some who are plainly bold.

Originally posted by @Manolo D. :
Originally posted by @Joe Cummings:

Using a factoring company makes you look bad to your customers. Makes you look "hard up for cash"

 I have a unique situation, I am looking for a factoring company that can do financing as well for working capital, at the pace that I want to grow, I could not do it alone. I have the skills and the company has the ability, but need the financial push to make it. More on the development side and government contracting, they're not really for real estate. But yes, I would agree with Rita, they aren't that bad, there are some who are plainly bold.

 All the larger gov contracting I've handled had a structured schedule of payments as the work progressed. Most required me to submit AIA G702 and 703 for payment.

Kind of hard to get government contracts if you are low on cash, or even if you are cash strong but have a year that is a loser. Bonding companies want to see a strong track record.

Factoring is pretty much is the business equivalent of a "payday loan". In the circles I run in if you factor word gets around fast. When everyone knows you're tight on reserves, you end up working for cheap.

@Joe Cummings I am not that big yet, I am on my way there, 702 and 703 doesn't qualify for me at the moment, the size I work with < 150k, it only takes 1 progress and 1 final, I need somebody to bridge it. There are government programs that will guarantee 85% of the contract performance bond, if your agent/broker doesn't know this, then it is time to switch. they are rigorous to comply but it is what it is, either you work with it or you're stuck to a 50/100 bond, I have 150/150 right now and on my way to qualifying for the 85% guarantee.

As for the prices, if they don't like it, I walk away, on the bright side, if this puts more appointments on my calendar because they think I am cheap, then great, the downside is, private individuals will be afraid to do a transaction with me because they would think that I am "hard up for cash", then they are wrong --I have a 6 digit line of credit from private individual that I would not like to put on any application just because its not verifiable-- and I could care less, government entities or development projects doesn't care anyways.

For private projects, I do not need the income on a weekly basis to pay my own bills (unlike the handymen and most small GCs where personal drama gets involved in your project), if they could cover payroll and materials weekly, then that's all I need, I will take the profit at the end and only after satisfying the contract.

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