What is Construction Factoring?
Construction Factoring is a specialist invoice finance product, used by businesses in the Construction industry and associated trades. This product is only offered by a small pool of UK funders that understand and have an appetite for the often-complex nature of construction contracts.
Your company may complete a stage of a contract and raise an application for payment. You can then release funding within 24 hours of raising a certified or uncertified application for payment. Typically, you can receive a higher advance if you can wait for the payment certification to be received.
With long payment terms and late payments continuing to be a challenge in the construction industry, faster access to your capital can help you with enabling costs on new projects and to meet your own ongoing financial commitments, such as materials, payroll and HMRC
Why Standard Invoice Finance Doesn’t Always Fit Construction
Most invoice finance is built around a simple idea, you deliver goods or services, you raise an invoice, and that invoice is treated as an undisputed debt. Construction rarely works quite that cleanly. You might submit an application for payment showing what you believe is due, which then needs assessing and certifying by a main contractor, quantity surveyor or contract administrator before it becomes formally agreed. Part of every payment may also be withheld as retention until practical completion, or until the end of a defects period. Main contractors can apply contra charges, issue pay less notices, or dispute variations before they agree to pay.
None of this means you can’t access funding, it simply means you need a lender who understands how to assess this kind of debt properly, which is exactly why construction factoring exists as its own specialist product within invoice finance.
What Can Be Funded
Not every type of construction debt is treated the same way by a lender. Here’s a general guide to how different types of applications and invoices are typically viewed, though this will always depend on your specific contract and lender.
| What You’re Claiming For | Can It Typically Be Funded? | What Affects It |
|---|---|---|
| Certified application for payment | Usually, yes | The certified value, your customer’s credit standing, and any retention withheld |
| Uncertified application for payment | Only with specialist lenders | Your contract history, how often past applications have been reduced on certification, and the customer’s payment record |
| Completed work invoice | Usually, yes | Whether the invoice is undisputed |
| Staged or milestone invoice | Often | Whether the milestone has been formally accepted |
| Retention | Usually excluded or restricted | The release date and defects period |
| Unapproved variation | Difficult until agreed | Needs formal instruction and acceptance first |
| Materials on site | Case by case | Whether title has passed and the materials are identifiable and insured |
How Construction Factoring Works
We start by reviewing your business, your ledger and a sample of your contracts. We identify whether you’re mainly raising invoices, applications for payment, or a mixture of both, and we look at your certification history, meaning how often your applications are certified close to the value you originally submitted. We then compare this against our panel of construction factoring funders to find those most likely to accept your specific contract structure. Once a facility is agreed, funds are typically released within 24 hours of a certified application being submitted, and in some cases an uncertified one too, with the balance reconciled once your customer pays in full.
A Worked Example
Here’s an illustrative example only, your own facility will depend on your lender, your contract and your application history.
A subcontractor submits a certified application for payment worth £100,000, with £5,000 retention withheld. Lenders offering construction factoring typically agree an advance of between 50% and 65% against certified applications like this, so an initial payment could be released within 24 hours of the application being submitted. Where an application hasn’t yet been certified, funders who accept uncertified applications typically advance a lower proportion, often in the region of 40% to 55%, reflecting the extra risk involved before the value has been formally agreed. In both cases, the remaining balance is paid once the main contractor settles the application in full.
Construction Factoring can offer additional benefits such as credit control. This allows the funder to collect outstanding invoices on your behalf, confidentially if required so they are unaware of the funder’s involvement. You can also include bad debt protection which protects your advance in the event of client insolvency or non-payment of invoices.
If you are a main contractor or sub-contractor working in the UK construction this could be an ideal product for you. Whether you are working under a contract, framework agreement or purchase order, or if you raise an application for payment for part or completed works, we can guide you through the options available.
We would be delighted to talk to you about your requirements and to put together a shortlist of construction factoring funders that can help you. We will save you a substantial amount of time by making sure you meet the specific criteria of each funder, before putting together a shortlist and making any introductions.
For a deeper dive into the reasons why businesses use Construction Factoring, please see our video.
What You’ll Need to Apply
Having the following ready can speed up your application and helps you self-qualify before we approach any funders on your behalf:
- Recent management accounts
- An aged debtor and creditor report
- Recent bank statements
- Your current order book
- An example contract or two
- Recent applications for payment and certificates
- Details of any retentions
- Your main customer list and how concentrated your turnover is with them
- Details of any disputes or contra charges
Yes. Businesses switch construction factoring providers for a number of reasons, including restrictive reserves, poor understanding of applications for payment, or a facility that no longer matches their turnover. We can review your current ledger and contracts and help you compare what a new facility would actually make available, not just its headline limit.
Yes, in many cases. Confidential facilities mean your customers are not made aware of the funder’s involvement, and your business continues to manage its own credit control. Not every lender offers this on construction facilities, so it’s worth telling us early on if confidentiality matters to you.
Concentration with one customer can make funding more challenging, but it doesn’t automatically rule it out. Lenders will look at the credit strength of that main contractor and your payment history with them. This is exactly the kind of detail we go through with you before approaching funders, so we’re not putting you in front of a lender who’s unlikely to accept your particular circumstances.
It’s possible, though start-ups are generally assessed more closely, particularly around the strength of the contracts in place and the credit standing of the main contractors you’re working with. We can talk you through what a lender is likely to want to see and help present your business in the best possible light.
Your funder will normally reconcile your account against the certified or paid value rather than the amount originally submitted. If this happens regularly, a lender may adjust your future availability or hold a reserve, which is why your certification history matters so much when a facility is being set up.
Retention money is usually excluded from what can be funded, since it isn’t due to be paid until practical completion, or in some cases the end of the defects period. A small number of lenders may take a different view in specific circumstances, but it shouldn’t be assumed that retained amounts will be included in your available funding.
It depends on the type of debt and the lender. Certified applications for payment typically attract an advance of around 50% to 65%, while uncertified applications, where a lender accepts them at all, are usually advanced at a lower rate, often in the region of 40% to 55%. The exact figure depends on your contract, your customer and your payment history.
An invoice is usually raised for completed, agreed work and is treated as an undisputed debt. An application for payment is a request for an amount you believe is due, which then needs to be assessed and certified by a main contractor, quantity surveyor or contract administrator before it’s formally agreed. That extra step is why construction debts are assessed differently to standard invoices.
In some cases, yes, though only a limited number of specialist lenders will consider uncertified applications. They will typically look at your contract, your history of previous applications versus what was actually certified, and the payment record of your customer, before agreeing an advance, usually at a lower rate than a certified application would attract.
Yes. This is one of the main differences between construction factoring and standard invoice finance. Specialist construction funders are set up to assess and fund applications for payment, including staged or milestone applications, rather than only completed invoices.
Once a facility is in place, you continue submitting your applications for payment or invoices as normal. Your funder then advances a percentage of the certified, or in some cases uncertified, value, often within 24 hours. The remaining balance is paid once your main contractor settles the application in full, minus the funder’s fees.
Construction Factoring Case Study
Case Study: Helping a Fast-Growing Construction Company Switch Factoring Providers
