Most construction subcontractors are familiar with the concept of retainage. Basically, their general contractor (GC) withholds part of the payment (generally 10% to 20%) until the end of the project. This practice helps ensure that the subcontractor has an incentive to complete the job. The obvious problem for the subcontractor is that a big portion of their profit is tied in the retainage payment.
Retainage and factoring financing
It’s common for subcontractors to try to use construction factoring to get an advance on their retainage payment. They are usually disappointed when the factoring company informs them that the retainage portion of the invoice can’t be factored. So, why can’t factoring be used with the retainage portion of the invoice?
There are three reasons why the retainage can’t be factored:
- Most invoice factoring transactions have a time limit of 90 days per invoice. Retainage is often open for much more than 90 days.
- Even if the factor accepted an invoice for more than 90 days, the cost could be prohibitive.
- Retainage is usually subject to disputes as GCs haggle with subcontractors.
Although these are important concerns for factors, retainage disputes (item #3) are the major concern for factoring companies. In fact, disputes are also risky for the construction subcontractor because they are liable to pay back any factored invoices disputed by the client, which could put the subcontractor in a disadvantageous financial position.
As a rule of thumb, it’s best not to factor retainage invoices.
Get more information
We are a leading construction factoring company and can provide you with competitive terms. For information, get an online quote or call (877) 300 3258.