Why Can’t Construction Factoring Companies Factor Retainage Payments?

Most construction subcontractors are familiar with the concept of retainage. Basically, their general contractor (GC) withholds 5% to 10% (varies) of their payments until the project is completed. General contractors use this practice because withheld funds can be used to fix any issues with the work. Additionally, withheld funds are an incentive for the subcontractor to complete the job on time.

Unfortunately, retaining part of a payment can create a financial problem for subcontractors. Many subcontractors operate with tight cash flows and don’t have adequate emergency funds. Withholding a portion of a payment for a long period of time can lead to cash flow problems. These cash flow problems can affect their ability to pay their employees and suppliers on time.

Can retainage payments be factored?

Many subcontractors finance their invoices using a construction factoring program. Financing the company’s invoices improves its cash flow and provides funds to operate the business. However, some invoices can’t be financed.

Invoices for retainage, usually the last invoice of the project, can’t usually be factored. Some companies don’t submit a retainage invoice. Instead, a retainage percentage is withheld from every invoice. In this situation, the factoring company can finance the invoices but deducts the retainage percentage from the face value of the invoice.

Factoring companies are unable to finance retainage invoices for three reasons:

a) Factored invoices have a 90-day limit

Retainage invoices are usually outstanding for more than 90 days. Factoring companies are unable to finance invoices that pay in more than 90 days. The reason for this limitation is that these invoices:

  • Have a high chance of default
  • Can’t be credit insured
  • Aren’t allowed by the factor’s lenders
  • Have high dispute rates

b) The financing cost would be very high

Even if factoring companies were able to finance invoices over net-90 terms, the cost would be prohibitively high. Factoring is a comparatively expensive product due to its structure. It can work well if profit margins are above 20% and if invoices are paid in less than 90 days. From a financial perspective, it’s usually not a good idea to finance invoices that don’t meet these criteria.

c) Retainage payments are often subject to disputes

In our experience, retainage payments are usually subject to disputes from the general contractor. While some of the disputes are valid, many are not. These disputes are often used as a negotiating tactic by GCs that hope to pay less. Ultimately, financing these invoices creates problems for the subcontractor and their factor and won’t benefit your company.

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