Factoring receivables?

[Vic]

Hi, anyone here familiar with factoring receivables?

Our company does a lot of public works construction, mostly as a subcontractor. We usually work under an AIA (Pay when paid) contract, or an AGC contract.

We have many jobs that are waiting for the retention to be paid, sometimes stretched out into many months in aging of accounts. The money gets held up for various reasons, like the general contractor didn't finish the job, so the owner (usually a State or local government entity) isn't paying the retention. Since we are on a "Pay when paid" contract, we are obligated to sit for months waiting for our retention. Our A/R is in the many, many hundreds of thousands. Lately it seems that on almost every job, we have to issue a Stop Notice under California Mechanic's Lien law, and file a bond claim. But even these actions do not hurry up the cash flow, or at least, not by much.

So my question is-
Is our accounts receivable something that a factoring company would want to mess with? Anyone with any insight in this matter?

 

[barondw]

Speak to accountants in the garment trade as that is SOP. Also any professional accounting firm certainly is qualified to provide you with the required information.

Typically you sell your receivables to a third party. BUT....they don't buy at face value they discount the value since they are waiting and taking the risk. Thus if you didn't charge enough to begin with you can lose money because of the factoring/discount. Firms that factor all the time include the factoring cost in their selling price. It is problematic only for those firms that decide to factor after the fact with no provision built-in to their selling price.

They are going to charge at least the going interest rate plus a profit. So they may charge 15-20% depending on the credit worthiness of your firm and who is going to pay. Let's say you want to factor $ 200,000.00. Thus $200,000*20% = $40,000 or net of $ 160,000 to your firm.

Please keep in mind that the above figures are for illustrative purposes only and the actual numbers my be higher or lower.

Also here is a link:
http://www.bized.ac.uk/learn/accounting/financial/sources/factor.htm

End of factoring 101, hope this helps

Dave

 

[Vic]

Thanks a bunch! I'll go after that link in just a bit.

 

[4ord GT]

Vic, Something that you may want to consider about the "pay when paid" clause is that this clause is not there to keep the General Contractors from having to pay you unless they have been paid. They want you to believe that. The purpose of the clause is to make sure that they in fact do pay you when they are paid and not that they don't have to pay you until they have been paid. Read your contracts closely. AIA contracts word it properly. A lot of contracts similar to AIA reword this section to the GC's advantage. If a General Contractor has not been paid for work that you have completed for a reason that is not related to you, then you are due the money whether he has been paid or not. Alot of Lawyers don't even understand this clause completely. Good luck.

 

[Vic]

Thanks for that insight, I hadn't thought of it that way. I'll ask my lawyer if he understands that.

 

[4ord GT]

10-4. If if it was the other way it would be called a "pay if Paid" clause and not a " pay when paid clause"

 

[1418]

Vic, involve your accountant and attorney. They deal with a variety of businesses that may have encountered the same issues as you. Don't forget to ask some other persons within your industry, as to what they do - its free info. My final 2cents are that I noticed your concern was with cash flow- perhaps you may wish to seek a credit line- You use it only when you need it and is probably less costly and involved than factoring.

 

[Vic]

Great idea, 1418, I'll be looking into that. Soon as I get over this cold.....