Invoice factoring for construction companies means selling approved pay applications to a factor for an advance of up to 90% of the eligible amount, usually within 24 to 48 hours. Retainage is excluded. For a concrete sub waiting 60 days on a GC, it turns billed work into cash before the next pour.
Picture that concrete subcontractor: flatwork and foundations, three crews, about $3 million a year, mostly on commercial jobs for four general contractors. It bills monthly on AIA-style pay applications. The GCs pay 55 to 65 days after approval, hold 10% retainage, and two of them have pay-when-paid clauses. Payroll goes out every Friday. The company doesn't have a profit problem. It has a timing problem, and factoring was built for timing problems.
How does invoice factoring for construction companies work?
The mechanics are the same as any factoring arrangement, with construction-specific steps added at each stage:
- Setup. The factor reviews your contracts, your AR aging, and the GCs you bill. Setup through Sagamore's lending partners usually takes 3 to 5 business days.
- Notice of assignment. Each GC you factor receives a notice telling it to pay the factor instead of you.
- Submission. You send the approved pay app, the schedule of values, and the lien waivers the factor asks for.
- Verification. The factor confirms with the GC that the pay app is approved and that nothing is being held back.
- Advance. You receive up to 90% of the eligible amount, typically within 24 to 48 hours.
- Collection and rebate. The GC pays the factor. The factor releases the reserve to you, less its fee.
Our explainer on how invoice factoring works covers advances, reserves, and fees in general. The rest of this guide is about what changes when the invoice is a pay app.
What does a construction factor actually fund?
Only the part of your billing that's approved, earned, and not held back.
| Item | Usually fundable? | Why |
|---|---|---|
| Approved progress billing, net of retainage | Yes | Work is done and the paying party has signed off |
| Invoices for completed T&M or service work | Yes | Short, clean, easy to verify |
| Retainage | No | Not payable until the project or your scope is accepted |
| Pay apps still under review | No | The amount can still change |
| Unsigned change orders | No | Not yet a binding obligation |
| Billings subject to back-charges or disputes | No, or reduced | The GC may offset against them |
| Stored materials billed on a pay app | Sometimes | Depends on the contract and proof of storage |
Here's how that plays out for the concrete sub. It bills a $180,000 pay app. The GC approves it and holds 10% retainage, so $162,000 is payable. Assuming the factor advances 85% of that, the sub gets about $137,700 within two days of submitting, instead of waiting two months for $162,000. The remaining reserve, less the fee, comes back when the GC pays. The $18,000 of retainage waits for closeout either way.
Why do so many factors avoid construction?
Because the payment chain is long and has a lot of ways to break. A factor that buys a trucking invoice deals with one shipper. A factor that buys a sub's pay app is exposed to:
- Retainage, which shrinks every payment and arrives months later
- Pay-when-paid clauses, which tie your payment to the owner paying the GC
- Back-charges and offsets, where the GC deducts costs it claims you caused
- Lien rights, where unpaid lower-tier subs and suppliers can claim against the project
- Joint checks, where a supplier is named on the payment alongside you
Factors that specialize in construction price and structure for these risks. A general factor may decline the file or advance less. That's one reason working through a broker helps: Sagamore sends your file to lenders who already fund construction receivables.
How do lien waivers work with factoring?
Expect them on every draw. Before advancing, a construction factor typically wants:
- A conditional lien waiver from you for the pay app being factored
- Proof that your suppliers and lower-tier subs were paid on the prior pay app, often their unconditional waivers
- Confirmation that no one has filed a preliminary notice or lien you haven't resolved
This is the same paperwork most GCs already require, so the work is in sending it to two parties instead of one. Lien and notice deadlines differ by state and are strict. Talk to a construction attorney about your state's rules.
Should a construction company use factoring or AR financing?
Both turn receivables into cash. They differ in who the GC deals with and what the lender wants to see.
| Factoring | AR financing | |
|---|---|---|
| Structure | You sell the pay app | You borrow against your receivables |
| GC involvement | Notified; pays the factor | Not notified; pays you |
| Range through Sagamore | $10K to $5M | $25K to $5M |
| Setup | 3 to 5 business days | 5 to 7 business days |
| Funding after setup | 24 to 48 hours per submission | About one business day per draw |
| Fits | Faster growth, fewer years of financials | Larger, steadier receivables; you want to keep the GC relationship simple |
Some subs prefer AR financing because a GC that gets a notice of assignment may ask questions about the sub's finances. Others don't mind, especially on jobs where the GC works with factored subs all the time. Our comparison of factoring vs. AR financing goes into the cost and control differences.
What do lenders want from a construction company?
Sagamore's lending partners start with the same minimums for every product: a 600+ credit score, at least one year in business, and at least $400,000 in annual revenue. For factoring, the GC's or owner's payment record carries as much weight as yours.
Have these ready:
- AR aging by GC, showing days to pay
- Copies of the subcontracts you want to factor
- Recent approved pay apps and schedules of values
- A WIP schedule or backlog summary
- Contractor's license and certificate of insurance
- Any existing lender agreements, since a blanket lien on your receivables has to be released or subordinated first
Concentration matters. If one GC is 70% of your billing, the factor is mostly underwriting that GC, and it may cap how much of that GC's paper it buys.
How does factoring fit with the rest of a contractor's financing?
It covers billed work. It doesn't cover the weeks before your first pay app, when you're buying materials and paying crews on a job you haven't billed yet. That front end is usually a line of credit for contractors, or for large material packages, the options in our guide to a loan for construction materials. Equipment belongs on equipment financing.
Put together, the concrete sub draws on a line for the first month of each job, factors the slowest GC's pay apps once they're approved, and uses the factoring proceeds to pay the line down. Each tool covers its own gap. The bigger picture is in our guide to construction contractor financing and on our construction financing page.
Is construction factoring worth it?
It is when the gap is real and recurring, the GCs pay reliably once approved, and the job margins can carry a fee. It isn't when pay apps are routinely disputed or cut, since every dispute comes back to you, even under non-recourse terms.
If your approved pay apps are sitting at 60 days while payroll goes out weekly, start an application. Sagamore is a broker, not a factor. We'll match your receivables with lenders who fund construction and show you what each would advance.
