Construction Businesses Are Turning to Factoring to Overcome Short-Term Cash Flow Deficits

As I wrote in this blog in September, the construction industry is enjoying a strong recovery in South Florida, but the economic strains of the Great Recession took a heavy financial toll on many contractors as well as their suppliers and subcontractors. With the new projects that are now getting underway come new expenses for materials, equipment and labor, and many construction firms are having trouble meeting the financial obligations that come with taking on large new jobs. For many of these businesses, factoring finance companies offer a viable solution that can help them to overcome these short-term cash flow issues.

Factoring entails the selling of a company’s accounts receivable (i.e., invoices) to a third-party that is called a factor at a discount. The factor then collects the full amount from the debtors of the invoices in due course and pays the remaining balance to its client after deducting a commission and other charges. Because of the nature of the construction industry, cash flow tends to fluctuate a great deal based on when projects are started and completed, and invoice factoring enables construction firms to cover their short-term cash needs during periods in which their needs exceed their reserves.

The ability of factors to collect on the invoices that have been assigned to them by their clients is protected by the Florida Uniform Commercial Code. The code provides that once a debtor is notified that the company to which it owes money has assigned the right to receive the funds to the factor, the debtor must remit their payments directly to the factor. If they instead pay the factor’s client, they will be required to pay the factor again for the same invoice that it paid to the client.

Factoring is likely to grow in popularity with contractors and other construction industry businesses in today’s market. Our construction law attorneys have represented factoring clients, invoice debtors and factors, and we are available to assist with all of the aspects of these financing transactions. We write regularly in this blog about important legal and business issues for the construction industry in Florida, and we encourage industry followers to submit their email address in the subscription box at the top right of the blog in order to receive all of our future articles.