Factoring Construction Receivables Can Be Difficult
This recession has been really tough on a lot of industries. Other than retail, probably the hardest hit industry has been construction. Both residential and commercial contractors and subcontractors have had a tough time of it. Many trade subcontractors have gone out of business and those that are hanging on are only doing so by the tips of their fingers.
Recently I met a company that is a 26 year old plastering company. This company has had many good years, but the last several have been particularly tough. This company has never borrowed a cent outside of shareholder loans and during their last tough period in 2000, squeaked by using owner’s loans.
By the last quarter of 2009 the company had borrowed all it could from shareholders. The last 5 months have been the hardest. The company which in a good year has revenues of over $5 million is at a run rate for 2010 of less than $1 million. The large work projects that the company has relied for many years have simply disappeared.
To make matters worse, one of the company’s prime contractors owes them nearly $330,000 for work performed over a year ago. The owner and the prime contractor are in litigation and until that is resolved, the plastering company is not going to get paid.
Suddenly as things were looking the bleakest for this plastering company, two very large general contractors have come to them wanting them to do the plastering work on about $1.5 million in jobs during the next two quarters. The problem is the plastering company has no more safety cash and is considering turning to a factoring company for help.
There are a few things that construction contractors should know if they need to factor their accounts receivable:
General contractors generally hold 10% retainage on a project and can hold your money for as long as a year, so that portion of your accounts receivable is not eligible to borrow against.
Some trade sub-contractors bill on a percentage of completion basis. These are much harder to finance than when a contractor is billing on a time and materials basis. Only a few factoring companies nationwide will factor construction and only a precious few will finance your accounts receivable when you bill on a percentage of completion basis.
The plastering contractor I describe above has not been paid the $330,000 owed to them because their contract with the general contractor has a “paid when paid” clause in it. This clause says that the plastering subcontractor will receive its money after the general contractor gets theirs. In the case of the pending litigation, the building owner is withholding payment to the general contractor who is not paying their sub-contractors because their contracts don’t require it. A factoring company doesn’t want to be in the middle of a dispute between like this, so if the general contractor insists on a “paid when paid” clause, the receivable may be much harder to finance. Some sub-contractors negotiate this paragraph in the contract before it is awarded so that it reads that the only way the general contractor can withhold payment to the sub-contractor is if there is a dispute over quality of the work performed by the sub-contractor.
There are no easy answers for many construction trade sub-contractors. Hopefully this plastering company will be able to find a factoring company that will finance its accounts receivable without taking all the company profits. Hopefully the court handling the dispute between the owner and the general contractor will order the general contractor to pay the plastering company the large amount of money it is owed. The owner of the plastering company I use as an illustration says he is a survivor.
He knows if he can just get past the next thirty days until the new large jobs begin he will be past the worst of this recession. Hopefully he is right.
Sam Thacker is a partner in Austin Texas based Business Finance Solutions.
You may contact Sam directly at: sam@lesliethacker.com
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