Construction Invoice Factoring for Subcontractors: How It Works

Why Construction Factoring Is More Complicated

Construction introduces several legal and financial complexities that make factoring more involved than in other industries:

Progress billing: Instead of a single invoice for completed work, construction invoices are drawn progressively as work is completed. Each draw must be approved by the GC or owner before payment.

Retainage: GCs routinely hold back 5%–10% of each progress payment as retainage until substantial project completion. This portion can't typically be factored.

Mechanics' lien rights: Subcontractors have the right to file liens against a project if unpaid. Factoring companies must navigate these lien rights carefully when taking assignment of construction receivables.

Lien waivers: GCs require subs to sign lien waivers as a condition of payment. Factors need to coordinate the waiver process to protect their security interest while not prematurely releasing lien rights.

The Construction Factoring Process

1. Complete a phase of work and submit an application for payment (the draw request) to the GC.

2. GC approves the draw (this can take 2–4 weeks in many cases).

3. Submit the approved draw request to your factoring company along with any required lien waiver documents.

4. Factor advances 70%–85% of the approved invoice amount. The remaining 15%–30% is held in reserve (partly because retainage hasn't been included).

5. GC issues a joint check to you and the factor (in many programs), or pays the factor's lockbox directly.

6. Reserve is released when payment is received, minus the factoring fee.

Construction factoring timelines are longer than other industries. Draw approvals alone can take 2–4 weeks before funding even begins.

Lien Waivers and the Factor's Role

Lien waivers are the most complex part of construction factoring. Here's how most factors handle it:

Conditional lien waivers: Signed upon receipt of payment—not before. This protects your lien rights until actual money changes hands. Most sophisticated factors require conditional waivers.

Unconditional waivers: Signed before payment, which releases lien rights permanently. Reputable factors will not require you to sign unconditional waivers before they've advanced your funds—this would leave you with no protection if they fail to fund.

When a GC asks you to sign an unconditional waiver before you've received payment (or at least the factoring advance), this is a major red flag regardless of who your factor is.

Joint Check Programs

Many construction factors use joint check programs to simplify construction factoring:

1. The GC knows you use a factor for financing.

2. Rather than paying you directly, the GC issues a check made payable to both you and the factor.

3. Both parties must endorse the check before it clears.

4. The factor takes its fees and releases the balance to you.

Joint check programs reduce the risk of check diversion (you cashing the check and not paying back the factor) and often allow factors to advance at higher rates on construction invoices.