Construction factoring lets contractors and subcontractors turn approved progress billings into cash now, instead of waiting 30, 60 or 90+ days for the general contractor (GC) or owner to pay. Factors commonly advance about 70% to 90% of the billed amount after retainage, for fees of roughly 2% to 5% per 30 days. Use the free construction factoring calculator below to see your advance, fees and what you keep.
Construction Factoring Calculator
Example: a subcontractor bills $100,000 on an approved pay application. The GC holds back 10% retainage ($10,000), so $90,000 is factored. At an 80% advance, the sub gets $72,000 now. If the GC pays in 45 days at 3% per 30 days, two fee periods apply: $5,400 in fees. When the GC pays, the sub receives a $12,600 rebate, and the $10,000 retainage arrives later at project completion.
How Construction Factoring Works
- Bill the GC or owner. Submit your pay application (often on AIA G702/G703 forms) for work completed in the period.
- Get the billing approved. Factors generally fund only approved, undisputed billings.
- Submit to the factor with the pay application, lien waivers and contract documents. The factor sends the GC a notice of assignment so payment comes to the factor.
- Receive the advance, typically a percentage of the approved amount after retainage.
- The GC pays the factor on its normal schedule.
- Get the rebate. The factor releases the remaining reserve, minus its fees.
Construction Factoring Rates and Costs
| Cost item | What to expect |
|---|---|
| Advance rate | Commonly about 70% to 90% of the approved billing after retainage |
| Factoring fee | Commonly quoted at about 2% to 5% per 30 days the invoice is outstanding |
| Fee periods | Many factors charge for every period, or part of one, until the GC pays |
| Other fees | Possible application or setup fees, wire fees, lien and UCC search fees, and monthly minimums |
Construction factoring usually costs more than factoring in other industries, because the risks are higher: work is billed in progress, payments flow through several parties, and disputes, change orders and back charges can reduce what gets paid. For how factoring fees work in general, see our guide to invoice factoring rates.
How Retainage Works in Construction Factoring
Retainage (also called retention) is the share of each progress payment, commonly 5% to 10%, that the GC or owner holds back until the project is complete. Some states limit how much retainage can be withheld, especially on public projects.
- Most factors don't advance on retainage. They fund the billed amount after retainage, which is how the calculator above works.
- Retainage is paid to you later, usually at substantial or final completion, so plan your cash flow for it.
- Protect it in your lien waivers. Make sure progress lien waivers exclude retainage, so you only waive rights to retainage when it is actually paid.
Why Many Factors Avoid Construction Receivables
| Risk | Why it worries factors |
|---|---|
| Pay-when-paid and pay-if-paid clauses | Payment to the sub can depend on the owner paying the GC first |
| Back charges and offsets | The GC can deduct costs from what it owes |
| Disputes and change orders | Unapproved or disputed work may never be paid in full |
| Progress billing | Invoices cover partly finished work, not delivered goods |
| Mechanics liens and bonded jobs | Lien rights and bond claims add legal complexity to collections |
That's why construction factors look closely at your contract, the GC's payment history and your lien paperwork before funding.
Documents You'll Usually Need
- Signed contract or subcontract, including payment terms and any pay-when-paid or pay-if-paid clause
- Approved pay applications (for example AIA G702/G703) or invoices
- Conditional and unconditional lien waivers
- Notice of assignment acknowledged by the GC or owner
- An accounts receivable aging report for your open billings
- Certificate of insurance and basic company documents
Construction Factoring vs Other Funding Options
| Option | How it works | Best for |
|---|---|---|
| Construction factoring | Sell approved billings for an advance | Waiting on slow-paying GCs or owners |
| Business line of credit | Borrow and repay as needed up to a limit | Ongoing, uneven cash needs (see our line of credit calculator) |
| Mobilization funding | Cash to start a job before the first billing | Upfront labor, equipment and setup costs |
| Material or supplier financing | A lender pays suppliers; you repay later | Buying materials for a large job (see vendor financing) |
| Purchase order financing | Funds a supplier to fill a confirmed order | Product-based contracts (see PO financing) |
Pros and Cons of Construction Factoring
| Pros | Cons |
|---|---|
| Cash in days rather than waiting for slow pay cycles | More expensive than most bank financing |
| Approval depends mainly on your GC's or owner's credit | Retainage usually isn't funded |
| Doesn't add a traditional loan to your balance sheet | Your GC is notified and pays the factor |
| Grows with your billings | Extra paperwork: lien waivers, assignments and approvals |
Frequently Asked Questions
What is construction factoring?
Construction factoring is when a contractor or subcontractor sells approved progress billings or invoices to a factoring company for an upfront cash advance, instead of waiting 30 to 90 days or more for the general contractor or owner to pay.
What are typical construction factoring rates?
Commonly quoted fees run about 2% to 5% of the invoice per 30 days, with advance rates of roughly 70% to 90% of the billed amount after retainage. Your rate depends on the creditworthiness of the GC or owner, the project, your volume and how long the invoice takes to pay.
Can you factor retainage?
Usually not. Most factors advance only on the billed amount after retainage and leave retainage to be paid at project completion. A few specialty programs advance against retainage near the end of a project, typically at a lower advance rate.
Do I need the general contractor's approval to factor?
In practice, yes. The factor will usually send the GC or owner a notice of assignment telling them to pay the factor, and may ask them to confirm the amount owed and that the work was accepted.
Is construction factoring a loan?
No. You are selling receivables, not borrowing against them, so it does not add debt in the same way as a loan. The factor relies mainly on the credit of your customer, the GC or owner.
What is the difference between pay-when-paid and pay-if-paid?
A pay-when-paid clause sets the timing of payment to a subcontractor after the GC is paid. A pay-if-paid clause makes the GC's payment from the owner a condition of paying the sub, which shifts more risk to the sub. How courts treat each clause varies by state, and factors look closely at both.
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