What Is Materials Financing?

What Is Materials Financing?

What Is Materials Financing?

If you own a construction company, you likely know that it can take a while to get paid for your work. Materials financing offers a tool that lets you obtain the construction supplies you need without having to use up all your available cash. With construction materials financing, you’ll work with a partner that pays your material supplier for the materials directly. You pay them back when you get paid, with up to 120-day payment terms. Financing happens before the start of the project so you aren’t responsible for doling out cash to get the project rolling.

In this article, we walk you through what you need to know about materials financing to see if it’s the right funding option for your construction business. We compare materials financing to invoice factoring and explore the main advantages and considerations.

Construction Loans and Materials Financing

Running a business in the construction industry requires a lot of cash upfront. Combine that with it being notoriously difficult to get paid quickly, and you can see how financing can be an immense help. Two of the most common types of building supplies funding are construction loans and materials financing. But you can also find flexible alternative financing that can work, which we explain later in the article.

Construction loans

Standard construction loans give you money toward anything related to a construction project. However, they may be difficult to qualify for because you’re being approved for a loan on something that doesn’t exist yet and it can take longer to get the funds you need. You’ll also need to make sure your business credit is up to snuff to qualify for loans and get better terms. Learn how to establish business credit here.

Materials financing

On the other hand, construction materials financing can be easier to obtain. Some lenders focus their lending solely on the construction supplies and others allow you to buy whatever you need to run your business — including building materials. 

This funding helps in situations where you don’t get the funds from your last project before the next project starts, creating cash flow problems. But when you have access to materials financing, you’ll be able to pay for the building materials upfront rather than waiting for your last customer to pay. This allows you to grow your business faster by being able to bid on larger contracts that you otherwise couldn’t afford. 

Materials financing can also give you the best price from suppliers since you can get discounts for paying in cash. And depending on the lender, you can sometimes get financing as quickly as the same day you apply. However, keep an eye on the interest rate since it can be higher than a traditional construction loan.

Material Financing vs Invoice Factoring

Materials financing and invoice factoring are both ways to fund your construction business, but that’s where the similarities stop. Materials financing is when you partner with a lender to pay for construction supplies upfront. Invoice factoring is when your business sends your customer invoices to a factoring company. The factoring company pays your business a percentage of these invoices upfront and then contacts your customer directly to make sure they pay the invoice. After the invoice is paid in full, the factoring company gives your business the rest of the payment.

Here are the top differences between the two types of funding:

  1. Materials financing gives you support earlier. The materials financing company will purchase materials prior to you starting on a project. Meanwhile, invoice factoring takes place after the job is completed and you are ready to send out the invoice.
  2. The lender stays separated from your client. With invoice factoring, the lender pays you for the invoice and then contacts your client directly for payment. With materials financing, you are the only party that interacts with your clients.
  3. Invoice factoring removes the burden of getting paid. Lenders that offer invoice factoring take care of finalizing invoice payments for you. Materials financing doesn’t have that same advantage. 
  4. Different repayment terms. With materials financing, you usually have up to 120 days to pay back the balance. With invoice factoring, you’ll make a set number of payments, sometimes weekly, for a number of weeks until the balance is paid off.

Why Would General Contractors Prefer Subcontractors Who Use Materials Financing?

As a general contractor, working with a subcontractor that uses materials financing means that the project will stay on schedule. You won’t have to worry about your subcontractors not being able to afford their construction supplies on time. Working with someone who uses construction financing also reduces the risk that you’ll have to switch subcontractors halfway through the job because they can’t hold up their end of the agreement.

You’ll help keep your good reputation by increasing your chances of finishing your projects on schedule. 

When Is Materials Financing Not the Answer?

If you’re not ready to grow your business, materials financing might not be the best option for you since you have to pay interest. It gives you a chance to take on a big project before getting paid for the last one, but you will pay to borrow the money for materials. And interest rates may be higher with materials financing than with traditional construction loans. So businesses not quite at a point to increase the number of construction projects they take on may not find materials financing worth it. 

Also, if you’re only working in residential construction rather than commercial construction, materials financing may not be the right choice. Commercial construction projects are more strict about staying on schedule than residential construction, so it may not be worth the added cost to borrow to buy materials for a residential project. 

Finally, if you need construction financing that has longer terms than 120 days, you might want to consider other small business loans or lines of credit.

Where Can I Find Materials Financing? 

When business credit cards aren’t enough to cover the materials you need for your construction project, you can turn to materials financing to provide cash for the construction supplies you need. Here are a few online lenders that specialize in materials financing. 

Levelset

Levelset offers materials financing with up to 120-day terms. So you’ll likely have longer to pay than by buying the materials directly from the supplier. You’ll pay weekly charges and then the full balance once you get paid for the project. There’s a minimum purchase requirement of $5,000 for funding from Levelset.

Billd

Billd also has up to 120-day payment terms and gives you your payment details upfront. There are no surprise fees. You may get approved and have payment sent to your supplier the same day you apply. You can make payments directly on the Billd online platform. Billd won’t fund residential projects, however. 

Other flexible options

You might think you need to work with specific materials financing lenders to get funding for your building supplies, but that’s not the case. There are other flexible financing options similar to business startup loans that allow you to purchase whatever your construction business needs. 

Here are several alternative lenders you may be able to work with:

How Nav Can Help

Creating a free Nav account is the quickest way to find the best funding options for your business. Simply enter some business details and we will do the work on the backend to find the options you’re most likely to qualify for.

This article was originally written on June 29, 2022.

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