Invoice factoring

A factor advances a large share of the invoice up front, collects the full amount from your client, and then pays you the rest minus its fee. The fee depends on the client’s credit, the amount and how long the invoice takes to pay.

Factoring can bridge long payment terms, such as net 60 from a general contractor, when payroll can’t wait. It isn’t a loan in the usual sense: approval depends more on your client’s credit than on yours.

Construction is harder to factor than many industries because of retainage, pay-when-paid clauses, back charges and lien waivers. Some factors won’t buy construction receivables at all; others specialize in them. Read the agreement carefully: with recourse factoring, you buy the invoice back if the client doesn’t pay.

Your client will usually be told to pay the factor, so check your subcontract for limits on assigning payments, and think about how that will look to the client. Compare the total cost with a bank line of credit, or with negotiating a deposit and progress payments, either of which may cost less.