Construction invoice factoring

Published minimums, checked

What to establish before you approach a factor

1. Whether your contracts are on a standard form and which one. A factor's appetite changes completely between a simple supply contract and a subcontract with a main contractor's amendments in it.
2. How much retention is held and for how long. Retention is money you have earned and cannot draw, and almost no facility advances against it.
3. Whether there is a pay-when-paid or pay-if-paid clause. It moves the risk of somebody else's insolvency onto you, and a factor will price that.
4. How your applications are certified, by whom, and what the dispute history looks like. A disputed application is an unfundable one until it is resolved, and a factor will want to see how often that has happened before deciding what to advance against the next one.

Retention is the number that decides the facility

On a contract with five per cent retention held for a twelve-month defects period, five per cent of everything you invoice is money you will not see for a year, and no factoring facility will advance against it because it is contingent on work you have not yet been asked to do. That means a construction business running at typical margins has its entire profit sitting in retention accounts, and a factoring facility that funds ninety per cent of the certified value is funding ninety per cent of ninety-five per cent. Model that before you decide the facility solves the cash-flow problem, because for many subcontractors it narrows the gap rather than closing it.

Why general factors decline construction

Three features make the sector hard. Applications for payment are contested far more often than ordinary invoices, so the amount owed is not fixed at the point the factor advances. Set-off for defects means a customer can lawfully reduce a certified amount later. And the payment chain means your customer's ability to pay depends on their customer, whom the factor cannot assess. Specialist construction factors price all three; a general factor that quotes you without asking about any of them has either misunderstood your ledger or is about to reprice the facility once it sees one.

The alternatives worth pricing beside it

A construction business with a lumpy ledger and heavy plant is often better served by financing the plant and leaving the ledger alone. Equipment financing against machinery you already own releases cash without touching customer relationships or contract terms, and the six lenders with a live equipment page in this record include several that fund construction plant specifically. Price both. A facility that funds the ledger at a construction premium and a facility that funds the excavator at ordinary equipment rates can cost very different amounts for the same cash in the bank.

Common questions

Will a factor advance against retention?

Almost never, because retention is contingent on future obligations rather than owed today. Some specialist facilities will fund retention separately at a much higher price once the defects period is close to ending, but it should not be assumed in any cash-flow model built on a standard facility.

Can I factor applications for payment rather than invoices?

Some specialist construction factors will, usually against a certified application rather than an uncertified one, and usually at a lower advance rate than an ordinary invoice. A general factor that says yes without distinguishing between the two is worth a second question.

Does a pay-when-paid clause stop me factoring?

It does not stop you, but it changes what you are selling: the factor is now exposed to a party further up the chain that it cannot assess. Expect the clause to reduce the advance rate, raise the price, or both, and expect a factor to ask for the contract rather than take your word for it.

By borrowing product

• merchant cash advance: what the lenders who offer it actually require
• equipment financing: what the lenders who offer it actually require
• invoice factoring: what the lenders who offer it actually require