Managing Cash Flow through Invoice Finance in Construction

The lengthy nature of invoice payment in the construction industry leaves some businesses struggling to reach the end of the month without defaulting on their own financial obligations.

Cash flow is notoriously poor for construction firms and there’s a significant risk of serious financial decline if it’s not managed effectively. There is a type of finance that can provide a long-term remedy to the cash problems experienced by the sector, however.

What is invoice finance?

Invoice finance is a form of alternative funding that addresses the cash flow issues embedded in the construction industry. The fundamental issue here is the timescale between invoicing for work completed and obtaining payment.

Invoice funding provides an excellent solution to this problem and the arrangement is based on a firm’s sales ledger. Cash availability improves significantly, and provides the means for a construction business to pay suppliers, bills, and other ongoing liabilities without issue.

How does invoice funding help construction firms manage cash flow?

The borrowing business receives around 80-90 per cent of eligible invoices from the lender, and the remainder is paid once the customer pays the invoice in full – the lender’s fee is deducted from this figure.

The arrangement generates a steady flow of cash into a business during each month and allows firms to manage their cash and know they can fund upcoming construction projects with more certainty.

Invoice finance is ideal for construction sector businesses as it deals with the disconnect between invoicing and getting paid – a wait that can sometimes extend to 30, 60, or even more than 90 days.

Different types of invoice finance for the construction sector

Broadly, there are two types of invoice finance - factoring and invoice discounting -but other products also exist. Factoring and invoice discounting are similar in nature, but there are distinct differences between the two.

Factoring

A factoring arrangement allows a business to hand over control of its sales ledger to the lender. This offers distinct advantages if debt collection has been a time-consuming problem for them.

Invoice discounting

Invoice discounting is a confidential agreement between the borrower and the lender. Customers won’t know that funds are being raised in this way, which can be important for some businesses.

Single invoice finance

As the name suggests, borrowers can opt to put single invoices forward for financing. Spot factoring is a type of single invoice finance whereby the factor collects the payment. Single invoice discounting offers the same cash advance facility but the business remains responsible for collecting payment from their customer.

Are all construction firms eligible for invoice finance?

Typically, a construction business will need to meet the following criteria to be considered for invoice funding:

·      Annual turnover of at least £30,000

·      Payment terms of between 30 and 90days

·      A trading history that includes issuing invoices and successfully collecting payments

·      A business model whereby they trade with other businesses rather than consumers

Notably, invoice financiers tend to look at the creditworthiness of their borrower’s customers so it can be a good financing option for construction firms with a poor credit rating.

Invoice finance eases cash flow management in construction

The cash tied up in unpaid invoices can severely disrupt the smooth running of a construction firm. It prevents advance planning with any reliability, as there’s no certainty over whether they can afford to fund a project and fulfil their order books.

Invoice finance removes this uncertainty and can grow along with a construction business. It’s a scalable funding option, whereby, as business turnover increases, so does the finance facility.

This article was written by guest author Paul Williamson of Selling My Business. Paul’s expertise is in the valuing and sale of businesses and commercial properties on behalf of clients. Over his extensive career he has been involved in the sale of literally thousands of businesses, from relatively small retail businesses through to more notable, multi million pound business sales.

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