When it comes to running a roofing company, one of the biggest challenges is the fact that most general contractors and commercial clients require net-30 or net-60 terms on their invoices. This means that the company won’t get payment on an invoice for 30 to 60 days, which can be a problem since most roofing companies can’t wait that long for payment. Unfortunately, most of the time, roofing companies do not have a cash reserve or a line of credit to pay their expenses while they wait for customers to pay.
When a company can’t cover its expenses, they are in a precarious situation, juggling payments to meet its obligations. However, this can be extremely difficult in the long run- you may end up missing payments or payroll, which is when the real problems start.
Improving Cash Flow
Consider Offering Early Payment Discounts
If cash flow problems are not critical, you may want to consider offering discounts for clients who pay their invoices early. If done properly, this can significantly improve cash flow.
As the name indicates, early payment discounts give clients a discount on invoices paid within 10 days. There is no standard discount amount, but most companies do typically offer a 2% discount. If possible, get the agreement in writing to avoid issues.
It’s important to note that while offering an early payment discount can potentially improve cash flow, there’s no guarantee. Early payments are optional- your clients can choose to pay early or pay later based on their cash flow. Still, discounts are a step in the right direction for improving working capital.
Finance Slow-Paying Invoices with Factoring
For many roofing companies, it’s better to finance slow-paying invoices. This immediately improves cash flow, providing you with instant access to working capital. You can use the funds to pay your suppliers, and employees, or fund new projects.
This can be done through financing known as construction receivables factoring. The invoices are broken up into two installments: up to 80% is deposited as soon as the invoice is issued. The second installment covers the remaining 20%, minus the factoring fee, and is paid when your client pays the invoice.
Can You Finance All Invoices?
To qualify for construction receivables financing, you must meet the criteria listed below:
- An invoice should be payable by a creditworthy commercial client or general contractor
- Work listed on the invoice must be completed
- Invoices should be up to net-60 terms
- Invoices should be unencumbered by liens
- Your company must be a direct contractor or a subcontractor under a general contractor
Advantages of Construction Receivables Financing
The primary advantage of this type of financing for a roofing company is that it’s much easier to qualify for than traditional funding. The most important thing is that your clients are creditworthy, so you can use your client credit to your advantage.
Another advantage is that it’s flexible and can be increased, as long as your invoices meet the above criteria. This will help when you land larger projects.
Choosing the Right Lender
Since roofing companies work with general contractors and direct commercial clients, it can be difficult to find the right factoring company.
A conventional factoring company may be able to finance invoices for commercial clients, but not for general contractors. This is because most general contractors make progress payments, and the contracts often include a “pay-when-paid” clause- and most conventional factoring companies can’t work with this.
A roofing company needs to find a factoring company that can finance both commercial and general contractor invoices. When interviewing a factoring company, ask the following:
- How long have you been in business?
- Do you work with general contractors?
- Do you work with progress payment invoices?
- How do you deal with “pay-when-paid” clauses?
If you are interested in learning more about construction receivables financing or moving forward with finding the right company for you, contact WHW Capital today. We are familiar with factoring and can help you determine the right way to go.