Construction Subcontractor Financing Using Factoring

Construction Factoring

Dealing with cash flow problems is a part of daily life for most construction subcontractors. You have general contractors that are very slow payers. You have commercial clients who demand 30 to 60 day invoice payment terms. But you also have suppliers who demand quick payments and other expenses that need to be paid quickly. And you, as the subcontractor, are right in the middle managing your money. This can lead to working capital problems that affect your ability to run your company, make important payments or start new projects. You can fix these problems using business financing.

Will a bank help me?

Possibly, but probably not. Most lending institutions are leery of lending money to companies the construction industry. They have very strict rules regarding who can get funded and what they need to do to qualify for funding. Most business financing loans require that your company have a lot of collateral that can be posted as security for the loan. Also, they will need to see two to three years worth of audited financial reports. Obviously, most entrepreneurs and small subcontractors won't qualify for this type of funding.

A different alternative

Now, if your commercial customers paid quickly, you would not need funding. But that is hard to achieve, since most customers pay slowly to improve their cash flow. A better option is to finance your construction invoices. This accelerates the revenues that are tied to slow paying receivables and provides the money you need to operate your business - and to grow.

The transaction is relatively simple. You need to partner with a receivables factoring company who handles the transaction. They finance your A/R and handle all settlements. Most transactions are done using two installment payments, called the advance and the rebate. The advance covers around 80% of your open invoices and is provided as soon as the work is completed and accepted by your GC or client. The remaining 20%, less fees are rebated once your GC pays in full, as shown in this sample transaction.


Using construction receivables financing has a number of advantages. The most important one is that it will improve your cash flow very quickly. But the most important benefit is that it will allow you to offer payment terms to your clients without worrying about slow payments. That is because you can always finance a receivable if you need funds.


To qualify for this program you need to have credit worthy customers. This is very important because their invoices act as security for the transaction. Also, your company should not have any liens and should be free of major tax problems.

There are two main reasons why why construction factoring can fail. The first one is that contracts that have pay when paid clauses, which is common in the industry, cannot be financed until the clause is removed. This is because the payment is not guaranteed upon fulfillment of the contract, which can lead to problems. The second issue is if your company has a bond. Bonding companies will put a lien on your company which covers the invoices you want to finance, which prevents the factor from funding them.

Can retainage be factored?

Many construction contracts call for retainage, a 10% amount that is withheld until the project is completed. Retainage is usually deducted from the value of the invoice before it is factored. So if you have a $100 invoice with a 10% retainage, the factor will consider it as a $90 invoice.


Rates as low as 1.5%. Advances as high as 80% for qualified clients.
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Need more information? Go to the Factoring Resource Center or to the main page.

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