Every business runs into customers who either don’t pay on time, or don’t pay at all. There are certain industries where lack of cash flow is not quite as damaging as others, and the construction industry definitely falls under the category of the others.
Construction companies need cash flow to buy materials, pay workers, rent equipment, and start jobs. But what can a construction company do when the cash flow is slowed by unpaid invoices? There are ways to improve the rate at which customers pay, and options to explore when the cash flow slows down.
Be Stingy With Credit
The vetting process for credit applicants to your company should be comprehensive. Do not be shy about denying a customer a NET30 credit line and forcing that customer to pay in cash. If you start taking on too many obvious credit risks, then your company’s credit will be affected and your cash flow will suffer.
As you approve credit accounts, be sure that a member of your accounting team explains the terms clearly for each customer. After talking with the customer about their new account, your accounting team should send out a letter that emphasizes those terms. In many cases, customers will pay on time when they clearly understand your terms.
Have Good Invoicing Practices And Stand By Them
If it says on your invoices that any payments that are 90 days past due will be sent to a collection agency, then stand by that statement. By the time 90 days rolls around on an invoice, your company has lost a considerable amount of money. You can sell your 90-day old invoices to a collection agency and get at least a partial return on your money. You can also stop the bleeding that occurs when invoices go over 90 days past due.
Encourage customers to pay early by offering small discounts for early payments. You can offer one or two percent off the total invoice cost to customers who pay early, and still make a profit on your invoicing. You can also offer price discounts for future jobs to customers who maintain a record of paying invoices on time.
Invoice factoring is done by specialized finance companies that use your invoices as collateral. You submit an invoice to the factoring company, and the company determines the creditworthiness of your client. If your client’s credit is good, then the factoring company will advance you around 80 percent of the initial cost of the invoice. When your vendor pays the invoice to the factoring company, you get the remaining 20 percent minus fees.
Factoring is convenient because your company’s credit history doesn’t matter and you can usually get money in your account within 24 hours of submitting an invoice. But you should shop around for factoring companies and find one that charges reasonable fees. Most factoring companies charge based on a percentage of each invoice and, in some cases, that percentage can be high.
If you start a course with PDH Contractors, you can learn all about the financial issues that face the construction industry. At PDH Contractors, you can get the educational requirements you need to renew your licensing, and stay up to date on all of the challenges facing your industry.