Spot factoring is when the contractor factors a specific invoice. There are two common types of factoring based on volume: Spot factoring and contract factoring. The more invoices you sell to the factoring company, the better factoring rate you are typically able to negotiate. The creditworthiness of your customers will mainly determine whether or not an invoice will be funded. Your invoice factoring rate can be affected by the creditworthiness of your customer. Customer creditīefore a factoring company buys an invoice, they will likely run a credit check on the contractor who hired you. Ultimately, the more risk the factoring company takes, the higher your factoring rate will be. Each of these elements affects the risk that the factoring company is taking. These include the amount you’re factoring, the advance rate, your customer’s credit, and so on. The factoring rate or discount that you are charged will be influenced by a variety of elements. Things that affect invoice factoring cost The factoring company holds the remaining $20,000 in reserve. You receive an advance payment of $80,000. Variable Rate: An Exampleįor simplicity sake, let’s say you factor a $100,000 invoice or pay application on a construction project, with an advance rate of 80%. The longer your customer delays payment, the more expensive it becomes. For example, it might be 1% in the first month, 2% in the 2nd month, and 3% in the 3rd month. Variable RateĪ variable factoring rate increases each month that the invoice goes uncollected. If the flat rate is 1%, then you’ll pay 1% in the first month, 1% in the 2nd month, and so on. Using a flat rate, you pay the same percentage for each 30 days that it takes your customer to pay. Factoring rate optionsĬompanies generally charge a factoring rate in one of two formats: The factoring rate often ranges from 1% to 5% of the total amount, and typically applies to each 30-day period. How long a GC takes to pay an invoice also affects its factoring value. Once your customer pays the invoice, the factor will give you the remainder of the payment, minus the discount. The longer it takes your customer to pay, the higher this cost will be. The factoring rate is typically calculated on a 30-day basis. It is typically a small percentage of the invoice total. The factoring rateĪlso called the discount or discount rate, the factoring rate is the direct cost you pay for factoring an invoice.

Some advance rates can reach as high as 98%, but they typically range from 80% to 95%.Īgain, for the construction industry, the factoring advance rate would be calculated on the net invoice, with retainage subtracted. The advance rate is the percentage of the invoice that the factor provides up front. However, it’s important for construction companies to understand when considering factoring as an option for cash flow. In a practical sense, they consider retainage to be an extra progress payment at the end of a project.īecause retainage is so unique to the construction industry, you won’t hear factoring companies talk about this often. As a result, they will only factor the net invoice, without retainage. Typically, factoring companies will subtract the retainage amount from the invoice before factoring it. An invoice can only be factored for work already completed, before the invoice is due. You cannot factor future invoices, or invoices that are overdue. Main components of invoice factoring in construction The invoiceĪs soon as you submit a construction invoice or pay application to the contractor or owner for work you have already done, you should be able to factor it. They pay the rest – after subtracting the “discount,” or factoring rate – after they receive the payment from your customer. The factoring company pays the subcontractor a percentage of the invoice value immediately. Invoice factoring is a process in which a contractor sells an invoice or group of invoices to the “factor,” or factoring company. Invoice factoring can help construction companies cover expenses on a project before the GC or property owner actually pays their invoice. The delay between invoicing and getting paid can be difficult for companies without sufficient cash reserves. In the meantime, they still have project expenses to meet. If they submit the first invoice after 30 days, they won’t get paid until the GC, architect, and owner review and approve their application. When a construction project is first starting, subcontractors have to wait quite a while before their first payment comes in. There are a number of reasons why a contractor would consider factoring over other methods of construction finance. Video: Is invoice factoring right for your construction business?.Things that affect invoice factoring cost.

Main components of invoice factoring in construction.

Invoice factoring for contractors