Construction Factoring: How It Works and When It Fits

How construction factoring works

A factor advances a large share of an invoice's value now, collects from your customer, then pays the remainder minus fees.

Say you bill a commercial customer $50,000, due in 60 days. A factor might advance part of that amount within days and keep a fee. When the customer pays the factor, you receive the rest. Your customer usually knows about the arrangement and pays the factor directly.

What it costs

Fees are charged as a percentage of the invoice, often rising the longer the invoice stays unpaid. Compare the total, not the first number.

This is an illustrative example. If a factor charges 3% for the first 30 days and 1% for each additional 10 days on a $50,000 invoice paid in 60 days, the fee is about $2,000, or 4%. That sounds small, but 4% for 60 days is an annualized cost far above 4%. Read what is APR to compare it with other offers.

Who it fits, and who it does not

It fits contractors with solid commercial or government customers and slow-paying invoices. It fits poorly with residential jobs or disputed work.

Factors underwrite your customer's credit, not yours. Retainage, lien rights, change orders and disputed billings can complicate or block factoring. If your customers are individual homeowners, factoring is rarely available. Learn more in understanding invoice factoring.

Alternatives ROI Funder can place

A line of credit or working capital is the closest fit. You borrow against the business's overall revenue, not one invoice.

A business line of credit lets you draw for payroll and materials and repay as customers pay. Working capital provides a lump sum against revenue. These are not factoring and are not invoice-based. See also line of credit vs. invoice financing.

Questions to ask a factoring company

Ask about all fees, recourse, reserve amounts and what happens when a customer pays late or disputes an invoice.

• What is the total fee for a 30, 60 and 90-day invoice?
• Is it recourse? If the customer does not pay, do you owe the money back?
• How much is held in reserve, and when is it released?
• Are there minimums, setup fees or termination fees?
• How do you handle retainage and change orders?

Get the answers in writing, and compare them on total cost.

Liens, lien waivers and customer relationships

Factoring can interact with lien rights and with how general contractors treat their subs. Confirm before you sign.

A general contractor may not want to pay a third party, and some contracts restrict assigning receivables. Check your contract terms and any lender or bond agreements first. Talk to your attorney about how an assignment affects mechanics lien rights and waivers. A funding option that does not touch your invoices can avoid these questions entirely.

How to improve invoice payment without factoring

Clear contracts, prompt billing and consistent follow-up can shorten payment times at no cost.

Bill the day a milestone is met. Attach lien waivers and backup documents so the customer has no reason to delay. Offer an electronic payment option. Call about invoices a week before they are due. Some contractors add a small early-payment discount. Each day you save is a day of cash back in your account.

Important limits for contractors

Many funders restrict residential remodeling and new residential construction. Be upfront about your work mix.

ROI Funder considers 500+ FICO, 6+ months in business and $20,000+ monthly revenue. Commercial and trade contractors often fit, while residential-heavy work may be restricted by funders, so there is no promise of funding. Applying uses a soft credit pull with no obligation. Read the construction line of credit guide next.