Invoice Factoring for Construction Companies: Turning Progress Billings into Cash

Construction companies have a unique relationship with receivables. Unlike retail businesses that collect at point of sale or service companies that invoice for work just completed, contractors often wait 30-90 days between performing work and receiving payment. Progress billings, retainage, and general contractor payment flows create extended cash conversion cycles.

Invoice factoring offers a way to accelerate that cash flow. Instead of waiting 60 days for your customer to pay, you sell the invoice to a factoring company and receive most of the money immediately.

How Construction Factoring Works

Factoring is fundamentally simple: you sell invoices at a discount for immediate cash. The mechanics:

• You invoice your customer — Progress billing, completed phase, or final invoice.
• Factor purchases invoice — Typically advancing 80-90% of invoice value.
• Customer pays factor — Payment goes directly to the factoring company.
• Factor releases reserve — After collection, you receive remaining 10-20% minus fees.

Example: You bill a general contractor $100,000 for completed electrical work. The factor advances 85% ($85,000) within 24-48 hours. When the GC pays 45 days later, the factor sends you the remaining $15,000 minus their fee (perhaps $2,000-$3,000). Net result: $97,000-$98,000 instead of $100,000, but 44 days sooner.

Why Factoring Fits Construction

Several characteristics of construction make factoring a natural fit:

• Large invoices — Progress billings often run $50,000-$500,000+. Worth factoring individually.
• Creditworthy customers — General contractors and developers often have strong credit, which factors like.
• Long payment cycles — 60-90 day payment terms are common. More time to accelerate.
• Predictable collections — Contracted work with defined billing milestones.
• Growth constraints — Cash tied up in receivables limits ability to take new projects.

The Retainage Challenge

Retainage complicates construction factoring. When your customer holds 10% until project completion, factoring companies must account for this:

• Typical approach — Factor the billable portion (90%), retainage released later.
• Retainage-specific factoring — Some factors will advance against retainage too, at different rates.
• Documentation requirements — Factors want to understand retainage terms, release conditions, and timing.
• Project completion timing — Retainage factors need visibility into when projects will close.

Example: A $100,000 progress billing with 10% retainage means you invoice $90,000 billable now, $10,000 retainage later. A factor might advance 85% of the $90,000 ($76,500) immediately, with the remaining $13,500 plus retainage paid upon collection.

Cost of Construction Factoring

Factoring costs vary based on volume, customer creditworthiness, and collection period. Typical construction factoring:

Cost example: $200,000 invoice factored at 85% advance with 2.5% fee for 45-day collection.

• Initial advance: $170,000
• Factor fee: $5,000 (2.5% of $200,000)
• Reserve released at collection: $25,000
• Total received: $195,000
• Cost of acceleration: $5,000 (2.5%)
• Annualized: approximately 20% APR

When Factoring Makes Sense

Factoring is not for every situation. It works best when:

• Growth opportunity — Cash tied in receivables prevents taking profitable new work.
• Strong customer credit — Factor rates improve with creditworthy customers.
• Large invoices — Transaction costs make small invoices less economical.
• Predictable collections — Customers pay reliably, just slowly.
• Alternative costs are higher — Factoring beats missing payroll or taking an MCA.
• Margin supports the cost — 2-3% factoring fee on a 15% margin project is manageable.

When Factoring Does Not Work

Factoring has limitations for construction:

• Disputed invoices — Factors will not advance on invoices your customer may dispute.
• Customer concentration — Some factors limit exposure to any single customer.
• Very long collections — If customers take 120+ days, factoring costs add up.
• Low margins — 3% factoring on a 5% margin project wipes out most profit.
• Weak customers — Factors avoid invoices to customers with poor credit.
• Complex retainage — Multiple layers of retention can complicate factoring.

Choosing a Construction Factor

Not all factoring companies understand construction. Look for:

• Industry experience — Do they regularly factor construction receivables?
• Retainage handling — How do they treat retainage in their program?
• Contract review process — Do they understand progress billing and completion milestones?
• Customer notification — How do they handle notice to your customers?
• Recourse terms — What happens if your customer does not pay?
• Volume requirements — Do they have minimums that fit your billing patterns?

Recourse vs. Non-Recourse

An important distinction in factoring:

• Recourse factoring — If your customer does not pay, you buy back the invoice. Lower rates.
• Non-recourse factoring — Factor absorbs credit risk of customer non-payment. Higher rates.
• Reality — Most non-recourse factoring still has exceptions (disputes, fraud, etc.).

In construction, recourse factoring is more common. Factors figure that if a reputable GC does not pay, there is usually a dispute rather than credit default. They want you on the hook to resolve it.

Real-World Example: Subcontractor Growth

The situation: A mechanical subcontractor in Phoenix generates $4.8M annually with 8% net margins. Growth is constrained by cash flow — they have the backlog but cannot mobilize new projects while waiting 60 days for collections on current work.

The approach: Selective factoring with a construction-focused factor. Factor invoices to their three largest GC customers (representing 70% of revenue). 85% advance rate, 2% per 30 days.

Typical month: Factor $280,000 in invoices, receive $238,000 immediately. Average collection: 55 days. Monthly factoring cost: approximately $10,000.

The result: Freed up roughly $200,000 in working capital that had been tied in receivables. Took on two additional projects generating $380,000 in additional annual revenue and $30,000 in net profit.

Net benefit: $30,000 additional profit minus $120,000 annual factoring cost = negative $90,000? No — without factoring, they could not have taken the additional work at all. The choice was factor and grow, or stay constrained.

Factoring vs. Other Options

How factoring compares to alternatives:

Many contractors use factoring alongside a line of credit. Factor specific large invoices when you need acceleration, use the line for general working capital.

Getting Started with Factoring

To explore factoring for your construction business:

• Analyze your receivables — Who are your customers? What are your billing amounts? How long do collections take?
• Calculate the cost-benefit — Will factoring unlock opportunities worth more than the cost?
• Identify invoices to factor — Start with large invoices to creditworthy customers.
• Compare factors — Get quotes from at least 2-3 construction-experienced factors.
• Review contracts carefully — Understand recourse provisions, notification requirements, and termination terms.

Invoice factoring can be a powerful tool for construction companies constrained by collection timing. The cost is real, but for contractors who can put the accelerated cash to profitable use, the math often works.

Liminal can help you compare factoring and other financing options for your construction business. Our marketplace is free, takes about 2 minutes, and shows you offers without impacting your credit score.