1. Invoice Factoring: Construction companies sell their unpaid invoices or applications for payment to a factoring company. The factoring company advances a significant portion of the invoice amount (usually around 50-70%) to the construction company immediately, providing an infusion of cash. The factoring company then takes over the responsibility of collecting payments from the construction company’s clients.
Once the clients pay the invoices, the factoring company releases the remaining balance to the construction company, minus a fee. This fee covers the cost of financing and the factoring company’s services.
2. Invoice Discounting: Alternatively, construction companies can use their unpaid invoices or applications for payment as collateral to secure a loan or line of credit from a financial institution. In this case, the construction company retains control over the collection process and continues to manage its client relationships.
The financial institution advances a percentage of the invoice amount (typically 50-80%), and the construction company is responsible for collecting payments from clients. Once the clients pay, the construction company repays the loan or credit line with interest. This is typically available to larger and more established construction companies.