26 Jan Construction Finance – Why It’s Critical For Property Development
Developers quite often only pay their construction contractors between 60 and 90 days after they are invoiced. This means that construction businesses only have their invoices settled well after project completion.
Because of this quirk in the property development industry, construction businesses can experience a bottleneck in their cash flow. This is where construction finance can change the speed and efficiency of a project. It also means that managers don’t have to worry about cash drying up.
There are several different ways in which construction firms can access working capital to complete a project. This is particularly important for businesses that may be working on more than one project at a time. Late payment from one client could cause a bottleneck in funding for another project. Invoice discounting is also known as invoice trading. This method means that construction businesses can release funding to keep their projects afloat.
Invoice Trading As A Construction Finance Vehicle
Invoice trading is a straightforward method where a business can sell an individual invoice to release cash. As modern technology has advanced there are online invoice trading platforms where this is easily applied. It is a type of peer to peer trading, except the principles of traditional invoice trading are applied.
Application And Verification
Businesses apply only to join the virtual platform. This is very similar to when they would approach an agent in the real world. Approval is then processed, either by the online platform or by their traditional agent.
Either route can be chosen. Invoices for sale are verified and you’re good to go. Invoices can be as low as £1000 and can exceed £1 million. The invoice is then paid by the client into a client account which has been opened specifically for that purpose.
Sales Of The Invoice
Individual investors can buy the invoice. Alternatively, it could be sliced up and a share of the invoice sold to multiple investors. The proceeds of the sale usually add up to around 90% of the value of the invoice.
They will then become immediately available as cash for the business that has sold the invoice. As the invoice is paid, the proceeds are distributed to the investors by the trading platform or the conventional agent.
Online Trading Platforms – The Advantages
The most tangible advantage with online trading platforms is speed. Communication in the virtual world is instant and investors will be able to see a new investment opportunity immediately. Businesses that have sold one or more invoices will be able to access their funding within 48 hours. In this fast-moving world that is rather spectacular.
Invoices that include foreign debtors can be both funded and traded with ease using an online platform. Online platforms permit individual invoice trading rather than having to trade the entire ledger. This usually happens with invoice factoring. The construction firm seeking that finance gets the breathing space required without having to sell their entire book.
A combination of speed, flexibility, and an online support system means that online invoice trading makes the process quicker.
Invoice financing provides better alternatives to credit cards, loans, and other traditional avenues. Invoice trading means that the construction firm can continue its day to day running without incurring growing interest payments and penalties that occur as a result of their clients not paying them on time.
It also means that delays in projects are avoidable. Penalties that are tied to their own contracts are avoided as a direct consequence.
When To Use A Broker
Many firms are still wary of using online methods. Their regulations will require that a financially competent person deal with their invoice trading.
A good broker will know where the best place to go to trade invoices will be. This is because every business is different. A contractor seeking construction finance will differ, whether they are plumbers, bricklayers, or core contractors.
Always seek advice before deciding about invoice trading. Particularly when seeking urgent relief in construction finance.