Contractor General Factoring FAQs

Factoring can be used by construction companies that generate receivables from completed project work. Both general contractors and subcontractors may use factoring depending on the structure of the project and the receivables generated. The key requirement is that the receivable is tied to work that has been completed and documented.

Subcontractors generate receivables from completed work performed under construction projects. These receivables — typically invoiced to the general contractor rather than the project owner may be evaluated for funding by factoring companies that specialize in construction receivables. Approval is based on the creditworthiness of the general contractor responsible for payment.

Factoring involves the purchase of receivables generated from completed work it does not involve borrowing money. Construction companies regularly use factoring alongside other financing structures to manage project cash flow. Contractors should review project contracts and any lien rights associated with the project to ensure receivables can be assigned for funding.

Construction receivables may come from standard invoices or approved pay applications. Factoring companies experienced in construction understand these billing structures and evaluate receivables based on the documentation associated with completed project work. The invoice or pay application must reflect work that has been completed and is eligible for payment.

Many construction projects use pay applications rather than traditional invoices. Once a pay application is approved, it represents a receivable that can be evaluated for factoring. Factoring companies familiar with construction understand how these billing structures relate to project payment cycles and how to verify the work they represent.

Construction contracts frequently include retainage a portion of payment withheld until project completion or final inspection. Because retainage is not immediately payable, factoring companies may not fund it in the same way as receivables tied to completed and approved work. Contractors should clarify how each factoring provider handles retainage within their program before engaging.

Once the documentation supporting the receivable the invoice or pay application along with any supporting project documentation is verified, factoring companies may advance funds based on the approved billing amount. Timing may vary depending on project structure and the complexity of the documentation associated with the receivable.

Because factoring is based on receivable quality rather than the contractor’s balance sheet, the financial strength of the project owner, developer, or general contractor responsible for payment is the primary evaluation criterion. Understanding how factoring companies evaluate payment sources helps contractors anticipate which receivables are likely to be approved. See the Construction Factoring Definitions Guide [DF] for more on how credit evaluation works in construction factoring.

Factoring agreements vary depending on the provider. Some programs allow contractors to choose which receivables to submit, while others involve ongoing funding arrangements tied to project billing. Reviewing how each provider structures their programs is one of the key evaluation steps when comparing factoring companies. See the General Contractor How to Evaluate Guide [HE] for a full breakdown.