Construction Contractor Finance Alternatives: Assignment of Accounts Receivables vs. Factoring Agreements

Description

Construction industry stakeholders typically have to consider cash flow issues related to performance and payment. The lag between production and pay can lead those stakeholders to seek alternative forms of finance by assigning their accounts receivables as collateral for a secured loan, or they factor them. What impacts can this have on a construction project when a contractor or vendor assigns or factors its accounts receivable?

Both forms of finance provide upfront payments to the contractor, but several differences can affect the relationship with customers and a contractor's rights and obligations. Whether an assignment of receivables or a factor is used can alter lien rights. Most states require the client (or the factor as assignee) to notify the owner, general contractor, or bond company explaining that the client is providing services and materials on the project and must be paid. Some states require "notice of intent to lien" or "preliminary notices" instead, and if any required notice is late, even by one day, lien/bond rights are lost.

Contractors and counsel should consider due diligence that a factor or assignee may demand before funding. The financier will generally monitor construction projects and know the client's sub-subcontractors and suppliers to assure these parties are paid, and provide construction releases. If not, these sub-subcontractors and suppliers have the right to seek payment directly against the account debtor, offsetting the money owed to the factor. In essence, the factor must be confident the client has the skills to perform the construction work.

Listen as our expert panel discusses both assignments and factors, the risks and advantages of pursuing each option, and what due diligence a financier may consider before funding either payment method.