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You sell an unpaid but approved invoice to a financing company. They pay you most of its value now. They collect the full amount from your customer later, and keep a fee for the trouble. That's the entire mechanism. Everything else is just the fine print, and the fine print is where the good and bad deals actually get decided.
The two decisions that determine your deal
Recourse or non-recourse. Under recourse factoring, if your customer doesn't pay within the recourse period (typically 60-90 days), you buy the invoice back. You're still on the hook for the debt. Under non-recourse factoring, the financing company absorbs that loss instead, but charges more for taking on the risk. Recourse deals come with lower fees, faster approval, and higher advance rates. Non-recourse costs more but protects you if a client goes under. Most construction subs end up on recourse deals, since the fee difference is real money and a construction sub's actual risk is usually slow payment, not nonpayment.
Notification or non-notification. With notification factoring, the financing company tells your customer directly that they now own the invoice, and collections become their job. With non-notification factoring, you keep collecting as normal and your customer never knows the invoice was financed. If you'd rather your GC not know you're financing invoices, this is the term to ask about before signing anything.
What it costs in construction specifically
Construction factoring runs 2-5% per 30-day period, higher than most industries because of longer collection cycles and more complex payment structures. Advance rates typically land at 70-85% of the approved invoice, lower than the 90%+ common elsewhere, mainly because financing companies won't advance against retainage. If a GC is holding 5-10% back until substantial completion, that slice of the invoice simply isn't financeable, so your real advance is against the 90-95% that isn't retainage.
What actually gets financed
Not every invoice qualifies. Financing companies generally want the invoice approved, not just submitted, meaning the GC has signed off on the work and the amount. They'll look at your customer's payment history more than yours, since they're really underwriting whether the GC pays, not whether you're a good business. And they'll want to see the invoice is free of dispute, since a contested pay application isn't collectible collateral no matter how good your own credit is.
Where it fits and where it doesn't
It's a bridge for a specific, real timing gap between finishing work and getting paid for it. It is not a fix for a bad bid, and it's not a permanent substitute for negotiating better payment terms upfront. If you're financing every invoice every month indefinitely, run the math on whether the fees are quietly eating more margin than fixing the underlying payment terms would.
TL;DR
- Invoice finance converts an approved, unpaid invoice into cash now, for a fee, collected from your customer later.
- Recourse and notification terms matter more than the headline rate. Know both before you sign.
- Construction factoring runs 2-5% per 30 days with 70-85% advance rates, worse than other industries because of retainage.
- It bridges a timing gap. It doesn't fix a bad bid or a bad client relationship.
See how Constrafor's Early Pay is structured for construction payment timelines →
