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Challenges Factoring Companies and Contractors Face During Underwriting

Contractors Working Financing
Learn about the reasons why contractors have a difficult time getting approved with factoring companies, and not all factoring companies finance government receivables or construction contractors.

Breaking into government contracting or construction management is exciting and scary at the same time. While you’re thrilled to win bids on lucrative contracts, fulfilling those orders in a quality manner takes skill and money. You have a talented team of workers and managers in place to exceed your customer’s expectations, and you’ve heard that factoring companies can help with cash flow problems in a pinch. However, not all factoring companies are equal, and not all of them do invoice financing for government or construction contractors. Here are some reasons why.

Custom Work Requires Complicated Financing Terms

While some contracting jobs are straightforward, the more lucrative ones require creativity and skill to produce a custom product or service. This scenario is great for a defense contracting company that’s ready to go to work with a talented team of engineers. However, it’s not the ideal situation for government receivable factoring companies.

Factoring companies rely on underwriters to assess risks based upon a variety of factors that include billable work. These underwriters look at past performance to gather the needed data to make informed decisions. If your company is on contract to build a unique weapons systems component, underwriters don’t have the benefit of gathering past performance data about your project.

The government often uses cost-reimbursement and cost-plus contracts when the amount of contracted work can’t be estimated with laser precision up front. These types of contracts allow government contractors to get reimbursed for expenses up to a certain amount while they fulfil their contracts. If their expenses exceed the pre-set threshold amount, these contractors must get approval from the government before reimbursements are paid. Factoring company underwriters will have a hard time assessing risks for these types of contracts.

Unforeseen Schedule Delays

The basic principles of construction project management have been around for thousands of years. That doesn’t mean that every construction project gets accomplished without a hitch. Construction projects are known for their schedule delays due to bad weather and skilled staffing shortages. These delays impact billing, and factoring companies prefer not to factor invoices that are subject to unpredictable billing schedules.

Low-Volume Accounts Mean Higher Risk

While large defense contractors benefit from invoice factoring, it’s smaller companies that use the tool as a lifeline to sustain and grow their businesses. The problem is that these smaller companies often lack the capacity to take on multiple projects at once. They rely on a couple of large, lucrative contracts every few years to build their reputations with one or two government agencies. Factoring companies view the invoices from these low-volume accounts as higher risks than the invoices that come from businesses that bill dozens of customers. A factoring company that factors 12 invoices from a company and experiences one slow or no-pay invoice is often better off than a factoring company that only factors two invoices from a company and one of the invoices doesn’t get paid.

High-Dollar Receivable Financing

Besides being the cause of low-volume accounts for small businesses, government and construction contracts also need higher amounts of capital when it comes to invoice factoring. Most experienced factoring companies have the money to meet these high-dollar financing needs, but they see these types of low-volume accounts as a big risk. If the government complains of non-compliance, large invoice payments can be stalled indefinitely. Some factoring companies consider these risks during the underwriting process and tailor terms and fees to reflect the risk. Others simply won’t factor the invoice.

Infrequent Business Transactions

Like most businesses, factoring companies rely on strong business relationships to maintain market share. They expect to stretch the money that they spend on marketing, administrative duties, and transactional work to as many jobs as possible. In short, large-volume transactions are more cost effective to do than a few jobs that are sporadically done once every few years. To maintain relationships with contractor companies that need infrequent factoring services, a factoring company may insist on putting these contracting companies under long-term contracts. Some factoring companies charge contractors penalty fees for non-usage of accounts when they don’t have invoices to factor for several months at a time.

It’s Not You. It’s Your Customer

In addition to being notoriously slow to pay its contractors, the government also has some tricky rules about contractors assigning accounts receivables to third-party entities. The rules vary for local, state, and federal government contracts.

A government contracting company did some work for the Florida Department of Transportation (FDOT) and used a factoring company to get paid early. The factoring company followed the proper legal procedures for filing an assignment notification with FDOT. However, FDOT refused to pay the factoring company, and a lawsuit was filed. While Florida law didn’t prohibit accounts receivable assignments, there was an anti-assignment clause in the FDOT contract. The factoring company prevailed in court in this instance.

Legal experts warn factoring companies that the outcome could have been different if the federal government was involved. Federal government contracts are subject to the Anti-Assignments Act that only allows assignment of accounts receivables if the contractor meets a handful of strict requirements. According to the Federal Acquisition Regulation, the contractor must assign receivables to a trust company, bank, or financial institution such as a federal lending agency. The federal government customer must grant approval for the assignment.

Supplier Liens

While general contractors rely on their sub-contractors to be financially strong to maintain solvency during a project, they realize that suppliers need to offer credit terms in order to accommodate the sub-contractor in getting the raw materials needed. Supplier liens are very common now and may affect the ability to collect for a construction factoring company if the supplier liens are not disclosed before funding of an invoice occurs.

Finding the Right Factoring Company for Your Contracting Business

While factoring accounts receivables for contractors is complex, some factoring companies are up for the challenge. Look for factoring companies that specifically advertise financing services for construction and government contractors. Large factoring companies that employ agents who specialize in invoice financing for contractors are the best since they offer industry expertise and a wide range of financial resources.

We Understand Construction Receivables

We Can Help Your Business With:

  • More Cash On Hand for Everyday Expenses
  • Make Payroll and Taxes On-Time
  • Take On Larger & Profitable Jobs
  • Pay Suppliers On-Time
  • Pay When Pay Clause Accepted
  • Pay Your Subs Faster