In this article we discuss the importance of invoice financing for businesses in the construction / building game due to the capital-intensive nature of the industry.
Using your debtor book as an asset.
Most business owners don’t realise they can use their debtor book as security to get financing against it. Using debtor financing / debt factoring / invoice financing is one of the easiest ways a business can obtain finance without property! Proving your debtor book is comprised of businesses, and the invoices can’t be contested. Invoice financing is simply one form of private lending, that borrowers can look at.
Invoice finance in the building game
Fewer and fewer financiers will fund businesses in the building / construction industry, as it is seen to be a high-risk industry with many issues regarding payments. Whilst the Security of payment Act 2002 provides a degree of protection, many financiers are still hesitant compared to other industries.
One of the most important things invoice financiers look at besides the default rate for a particular industry, is the degree to which invoices can be contested. The building and construction industry is one of those industries where in many cases, invoices are subject to a high rate of contestability and nonpayment. As such many debt factoring companies and banks are hesitant when funding invoices in the industry.
Fundamentally, what all this meant was that we at Royce Stone Capital had to find an invoice financing solution for our clients in the construction industry as discussed below.
Debt factoring for new business
The issue only gets worse for new businesses that desperately need invoice financing to help them grow, as most banks and second tiers will not fund new businesses in the building game. Some debt factoring companies will only provide invoice financing if they can cross collateralise their invoices with other assets such as property!
The reality is that whilst invoice financing can carry risks for a potential financier, there are many good businesses that are subcontracts to tier 1s and tier 2s, that have secure invoices that can be used as security for loans.
What this fundamentally meant, was that there was an opportunity for a risk adjusted invoice financing solution to be developed specifically for this market, as we discuss below.
The construction industry is capital intensive.
Construction is one of the most capital-intensive industries, and more importantly has high labour costs and material costs. Consequently, this puts large cashflow strains on businesses. This problem only amplifies, when businesses are forced to wait 30 to 90 days for payments! These businesses must then pay staff, sub-contractors and materials from their cashflows until invoice payment is made! This especially burdens new businesses, that are just starting to grow!
This means that many smaller businesses, and even medium size businesses working on slim margins do not have the ability to take on new jobs and grow their businesses!!!
The solution for businesses in building
At Royce Stone Capital, we’ve developed industry specific invoice financing solutions with wholesale funds that understand the construction industry, who don’t mind the additional risk. These aren’t your average invoice financiers that mortgage brokers deal with! These are wholesale private funds, that have worked with us to develop solutions!
We’ve successfully provided solutions for several new businesses in the building game to secure them financing. No property required as security, no cross collateralization with other assets and no 2 years of financials required!
These wholesale funds spend the time to understand you, your business and how risk can be reduced to help provide you with a solution. Whether you need $200k or $5M against your debtor book.
Other solutions for businesses in construction
You may wish to consider looking at private loans, and using property as security to help get you more funds. Whether you want to consider a first mortgage private loan or a second mortgage / caveat loan, a mix of funding options can help your business grow.
To learn more about invoice financing click here.
To contact us directly for a confidential discussion, click here.
