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When it comes to construction financing, timing is everything.
Cash-flow pressure can show up at different points in a project. If a contractor has a healthy reserve in their bank account, the pressure might not show up until the first pay app, when a contractor has done the work and is waiting 30, 60, or 90 days for an invoice to be paid. Other times it starts much earlier, when labor payroll, materials, equipment, and mobilization costs are due and the first pay app won’t even be submitted for weeks.
For subcontractors weighing contract financing vs. invoice factoring, the right fit depends on when you need the money.
Before the invoice vs. after the invoice
Construction invoice factoring is built around an existing receivable–an invoice or pay application. Once work has been performed and an invoice has been submitted, a factoring company can advance a portion of that invoice rather than the subcontractor waiting for the customer to pay.
Contract financing comes into play earlier. With a signed contract in place, this type of financing can help cover project-specific costs such as labor, materials, equipment, and mobilization before those costs turn into billable work.
Put simply, factoring can help shorten the wait for money the business has already earned. Contract financing can help provide the capital needed to perform the work in the first place.
Financing a $1M job, step by step
Here’s an example: you’re a subcontractor who has just landed a $1M contract. It’s a big win, but before the first pay application can even be submitted, you need to put crews on the job, secure materials, rent equipment, and cover other startup costs.
With contract financing, capital can be available at the start of the project to help cover those costs as they come due. You use the funding to get the work underway, reach the first billing milestone, and submit your pay application.
If you’re using invoice factoring, the sequence doesn’t start until you’re ready to submit an invoice. From there, factoring can help you access some of that money sooner instead of waiting for the customer to pay.
Contract financing vs. factoring: the best option for your business
Invoice factoring may be the right fit if you have enough capital to perform the work but routinely have cash tied up in unpaid invoices. The project is moving, the billing has happened, but you’re crunched in the time between invoicing and payment.
Contract financing may help if your business is facing pressure earlier in the cycle: stepping into a larger project, for instance, starting several jobs close together, or taking on work that requires significant payroll, material, equipment, or mobilization spending before billing begins.
That distinction can become especially important as the business grows. Larger projects can require more cash upfront, and using too much existing working capital to get one job started may leave less available for another project or for the day-to-day needs of the company.
Access to funding at the right stage can also make it easier to pay vendors and payroll on time, secure the materials and equipment the job requires, and keep work moving without waiting for the first pay application to clear.
Look at what the project needs from your cash
Timing can narrow down the financing options, but it’s also worth looking at what taking on the project will require from the rest of the business.
If you can comfortably cover startup costs and the main challenge is waiting on receivables, invoice factoring may be enough. If getting the job started would tie up working capital you need for payroll, another project, or day-to-day operations, contract financing may give you more room to manage both the project and the business around it.
The goal is to choose financing that fits the project without creating unnecessary pressure somewhere else.