Construction factoring is a specialized type of invoice factoring adapted to work in the construction industry. It is very similar to invoice factoring, though it has some key differences.
This article covers the main differences between both programs. It helps construction subcontractors determine if construction factoring is right for them. Read “What is construction factoring? How does it work?” to learn more.
Differences
Construction factoring programs use the same general structure as conventional invoice factoring programs. They also use similar processes. However, the programs typically differ in five key areas:
1. Progress billing
Most conventional factoring companies are unable to handle progress billing. This is because progress payments are difficult to verify and process. Additionally, progress payment invoices are more likely to be disputed or paid slowly.
On the other hand, construction factoring companies are comfortable with progress payments. They have adapted their invoice verification and risk procedures to work with these invoices.
2. Verification procedures
Every factoring company verifies the invoices they purchase. They do this to ensure the goods/services have been received, the invoice amount is accurate, and the payment date is correct. The process is usually simple and can be done through a company’s vendor portal.
On the other hand, construction factoring companies use a more hands-on approach to the verification process. This more involved approach limits potential payment problems. The verification process determines that:
- Materials have been delivered
- Work (or work progress) has been completed
- There are no disputes or holdbacks
3. Minimums
Many factoring companies offer plans with no minimums. However, construction factoring companies often require high minimums. Most construction factoring companies will work only with subcontractors that invoice at least $50,000 per month. Note that minimums vary by company.
4. Higher pricing
Construction factoring is a niche product that requires more involvement than invoice factoring and carries a higher risk. Consequently, this is reflected in the price. A construction factoring line will be modestly more expensive than an invoice factoring line of similar size.
5. Lower advances
Construction invoices are more likely to have an underpayment than conventional invoices. This can be due to holdbacks (e.g., retainage), disputes, or other issues. Construction factoring companies account for this by lowering their advances. Advances typically go from 70% to 85%, which varies based on your company’s circumstances.
Is construction factoring for you?
The following five criteria can help you determine if you should consider construction factoring.
1. You work as a subcontractor
Construction factoring companies can only work with subcontractors. Unfortunately, they are not able to provide financing to GCs. This is due to how the lien and supplier payment management.
2. You meet the factoring minimums
Your company must invoice at least the minimum monthly amount, though higher amounts are preferable.
3. Your company is not bonded
Construction factoring companies cannot finance subcontractors that are bonded. This is because the bonding company usually takes an “all assets” lien. The lien prevents the construction factoring company from having a 1st position lien on the accounts receivable they finance (see #4). Note that there is no problem if your GC has a bond for the job.
4. You don’t have loans or cash advances
Loans and cash advances are typically secured with a lien against “all assets.” This lien prevents the construction factoring company from having a 1st position on the invoices they finance.
The only way around this issue is to ask your lender for a subordination. In our experience, lenders seldom agree to subordinate their rights.
5. You don’t have serious tax or legal issues
Your construction company must have serious tax or legal issues. Factoring companies may be able to work around minor issues, provided they don’t affect your company’s ability to stay in business. Your company must also have a workout plan to resolve the issues.
Get more information
Are you looking for a factoring quote? We provide construction factoring at affordable terms. For more information, get an online quote or call us toll-free at (877) 300 3258.