Construction Sub Contractor Factoring Definitions

Instead of waiting for payment from the general contractor responsible for the invoice, the subcontractor receives funding based on the value of the receivable. The factoring company then collects payment from the general contractor when the invoice becomes due. Factoring is not a loan the subcontractor sells the receivable rather than borrowing against it.

Construction invoices serve as the primary receivable in subcontractor factoring programs. Factoring companies review the work documented in the invoice, the approval status of the billing milestone, and the creditworthiness of the general contractor responsible for payment before advancing funds.

When a subcontractor submits an invoice for factoring, the factoring company advances a portion of the invoice value immediately typically 80 to 90 percent for construction receivables. The remaining balance is held as a reserve until the general contractor pays the invoice. Advance rates vary depending on the factoring company, the general contractor’s credit profile, and the documentation supporting the receivable.

After advancing funds on an invoice, the factoring company retains a percentage as a reserve. Once payment is received from the general contractor, the reserve is released to the subcontractor after the factoring fee is deducted. Reserves protect the factoring company against short payments, disputes, or documentation issues that arise during the collection process.

Factoring fees are typically calculated as a percentage of the invoice value. The total fee reflects how long the invoice remains outstanding before the general contractor pays. Construction receivables tied to longer payment timelines or multi-party approval processes may carry higher total fees. For a full breakdown, see the Subcontractor Factoring Cost Guide [CO].

Progress billing is the standard billing method on most construction projects. Subcontractors submit invoices as work is completed during each phase, and those invoices represent receivables tied to the approved portion of the project. Factoring companies experienced in construction understand how progress billing works and how to evaluate these invoices as fundable receivables.

Lien waivers are a standard part of construction payment processes and are frequently required as part of the invoice documentation package before a factoring company advances funds. Conditional lien waivers are issued in exchange for expected payment; unconditional waivers are issued after payment is confirmed. Understanding how the factoring company handles lien waivers is an important operational consideration when comparing providers.

Before funding a construction invoice, the factoring company verifies that the work has been performed as documented and that the receivable is not subject to disputes or outstanding issues. Invoice verification speed directly affects how quickly subcontractors receive funding which is why documentation completeness matters significantly in construction factoring.

Recourse factoring is the most common structure in subcontractor programs. The factoring company advances funds against invoices, but the subcontractor remains responsible if the invoice cannot ultimately be collected due to disputes, documentation deficiencies, or project disagreements. Because the factoring company retains less credit risk, recourse programs typically allow for more flexible credit approval policies.

Non-recourse programs may provide protection against credit losses if an approved general contractor becomes unable to pay due to insolvency. However, non-recourse protection covers credit risk only not disputes, documentation issues, lien problems, or performance-related claims. These programs generally operate with more conservative credit approval policies.

Under notification factoring, the general contractor receives payment instructions directing funds to the factoring company rather than the subcontractor. This becomes part of the standard billing process once the factoring relationship is established and is widely understood in the construction industry.

Payment terms define how long the general contractor has to pay the subcontractor’s invoice after it is submitted and approved. Terms of sale influence how long invoices remain outstanding and directly affect factoring pricing longer outstanding periods generally result in higher total factoring fees.