How does invoice factoring work for construction companies?

Short answer

Construction invoice factoring turns approved progress billings into cash, so you can make payroll and buy materials while the general contractor or owner takes 30 to 90 days to pay. It works best on approved, undisputed billings. Retainage, pay-when-paid clauses and lien rules make construction harder to factor than most industries, so terms vary.

Why contractors run short of cash

Construction pays late by design. You cover labor, materials and equipment as the work happens, then bill monthly through a pay application. The general contractor or owner reviews it, may dispute line items, and often pays 30 to 90 days later. On top of that, retainage, usually 5% to 10% of each payment, is held back until the job or a milestone is complete. A growing contractor can have most of its cash tied up in unpaid billings.

How factoring works on a pay application

You submit your pay application for work completed, with any lien waivers the contract requires.
The general contractor or owner approves it. Factoring companies usually fund only approved billings.
You get an advance on the approved amount. Through Break Bread Lending, advances run up to 95% of eligible invoice value, typically within 24 to 48 hours once your account is set up. Retainage usually isn't advanced.
The paying party sends payment to the factoring company, after it's notified of the assignment.
You receive the rest, minus the fee, when the billing is paid.

What makes construction harder to factor

Retainage. The held-back amount isn't paid until later, so it's usually excluded from the advance.
Pay-when-paid or pay-if-paid clauses. If you're only paid when the owner pays the general contractor, the factoring company takes on more risk and may decline or price it higher.
Disputes and change orders. Unapproved change orders and disputed line items usually can't be factored.
Liens and bonds. Lien rights, lien waivers and payment bonds affect who gets paid and when. On federal construction contracts over $100,000, the Miller Act requires the prime contractor to post a payment bond.
Government receivables. Assigning payments on federal contracts follows the Assignment of Claims Act. See the Assignment of Claims Act for subcontractors.

What it costs

Across industries, NerdWallet reports factoring fees often run 1% to 5% of the invoice value per month. Construction billings can sit on the higher side because payment timing is less predictable. Ask for the advance rate, the fee schedule after the first 30 days, any minimums, and how retainage is handled, all in writing.

Who it fits

Subcontractors and contractors billing creditworthy general contractors, owners or public agencies.
Businesses with approved, undisputed billings and clean lien paperwork.
Fast-growing contractors whose bank line hasn't kept up with their backlog.

When something else fits better

A business line of credit fits recurring gaps for materials and mobilization if your financials qualify. See factoring vs a line of credit.
A term loan fits equipment, a yard or a one-time investment with a long payback. See term loans for small business.
If daily merchant cash advance payments are draining the account, start with construction MCA help.

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Frequently asked questions

Can you factor construction progress billings?

Often, yes, once the general contractor or owner approves the billing. Factoring companies usually don't fund unapproved billings, disputed items or unapproved change orders.

Can you factor retainage?

Usually not upfront. Retainage is held until completion or a milestone, so most factoring companies exclude it from the advance and handle it when it's released, if at all.

Will the general contractor know I'm factoring?

Usually, yes. The paying party is notified to send payment to the factoring company. It's a normal part of construction factoring.

Can a subcontractor factor invoices to a prime contractor?

Yes, if the billing is approved and the prime contractor is creditworthy. Pay-when-paid clauses can make it harder. See can you factor invoices to a prime contractor?

How much does construction factoring cost?

It varies by program. Across industries, factoring fees often run 1% to 5% of the invoice value per month, and slower or less predictable payments usually cost more. Get every fee in writing before you sign.

Is construction factoring a loan?

No. You're selling approved receivables at a discount. Approval leans on the paying party's credit, though some agreements also include a personal or validity guarantee.

Disclosure

Factoring is subject to review of your customers, billings, contracts and lien position, and approval isn't guaranteed. Advance rates, fees and terms vary and are confirmed in writing before you sign. Some agreements include a personal guarantee or a validity guarantee. Under recourse factoring you may have to buy back billings that aren't paid. Break Bread Lending isn't a bank. This page is general education, not financial or legal advice.