Subcontractors carry a cash-flow problem most businesses never face. You buy materials, make payroll every week and finish the work, then wait 30 to 90 days to get paid. On top of that, the general contractor holds back 5% to 10% as retainage until the whole project closes out. Construction invoice factoring can bridge that gap, but construction is also the industry many factoring companies avoid. Here is what works, what doesn’t, and how to get approved.
Why many factors turn down construction
Factoring a construction invoice is harder than factoring a delivered product. Factors worry about:
- Pay-when-paid clauses. Your GC may not owe you until the owner pays them, which stretches collection times.
- Retainage. Part of every invoice won’t be paid for months, so it can’t be advanced against.
- Disputes and backcharges. Punch-list items, change-order arguments and backcharges reduce what actually gets paid.
- Lien rights and bonding. Unpaid suppliers and second-tier subs can file liens that compete with the factor’s claim.
- Progress billing. An invoice for 40% completion is harder to verify than an invoice for a finished delivery.
The good news: specialty construction factors exist, and they approve subcontractors every day when the paperwork is in order.
What makes a subcontractor approvable
- Creditworthy GCs. Established general contractors, municipalities and large commercial owners with a record of paying.
- Clean pay applications. AIA G702/G703 pay apps or equivalent schedules of values that match the invoice.
- Approved work. Invoices for work the GC has signed off on, not work still in progress or in dispute.
- Lien waivers. Conditional and unconditional waivers filed on time, and proof your own suppliers are paid.
- Insurance and licensing. Current COI and contractor license for the job’s state.
How it works on a typical job
Say you are an electrical sub who bills a $60,000 progress payment with 10% retainage. The GC will pay $54,000 now and hold $6,000 until close-out. A construction factor might advance 75% to 85% of the $54,000 that is currently due (roughly $40,500 to $45,900), then release the balance minus its fee when the GC pays. The retainage is usually handled separately, if at all.
Advance rates in construction tend to run lower than in trucking or staffing because of the extra risk. Fees follow the same flat or tiered structure explained in invoice factoring rates and fees.
The straight talk: pros and cons for subs
Pros
- Lets you take bigger jobs without waiting on the last one to pay.
- Approval is driven by your GC’s credit, not just yours.
- Can cover payroll and materials during slow-pay stretches.
Cons
- Fewer factors to choose from, and their terms are stricter.
- Lower advance rates than other industries.
- Your GC will receive a notice of assignment, which some GCs dislike.
- Disputed invoices can come back to you under recourse terms. See recourse vs. non-recourse factoring.
Common misconceptions
“I can factor my retainage.” Usually not. Retainage isn’t due until close-out, so most factors won’t advance against it.
“A factor will fund work I haven’t billed yet.” Factoring is for invoices on completed, approved work. If you need cash to start a job, look at contractor funding, a working capital loan or a business line of credit.
“Factoring hurts my relationship with the GC.” It can if it is handled poorly. Good factors verify invoices professionally, and many GCs already work with factored subs.
Alternatives worth comparing
- Line of credit: usually cheaper if you have two or more years in business and solid financials.
- Working capital loan: a lump sum for mobilization costs, repaid over a set term.
- Equipment financing: keep cash free by financing lifts, trenchers, mixers or trucks separately through equipment leasing.
FAQ
Can I factor if my contract has a pay-when-paid clause?
Sometimes. Expect a lower advance rate and closer verification, and be ready to show the owner’s payment history on the project.
Do I need to factor every job?
Not always. Some construction factors allow job-by-job or invoice-by-invoice factoring.
What trades get approved most often?
Electrical, plumbing, HVAC, concrete, framing, drywall, roofing and site work subs working for established GCs are common approvals.
Get matched to a construction factor
Liberty Capital Group works with factors who understand pay apps, retainage and lien waivers, and we will tell you when a line of credit is the better fit. Read our invoice factoring overview or get a quote.