financial concept with dollars and yellow hardhat, selective focus on nearest part. concept: construction factoring
Timothy R
By: timothy-ronaldson
Read in 9 minutes

Construction Factoring vs Small Business Loans

Construction businesses can often have a challenging time with cash flow, which is why many look for financing alternatives to keep it going.

After all, getting capital is essential to any business. But that’s especially true in the construction industry. 

It can be very costly to run a construction business. From materials to equipment, there’s a lot that needs to be purchased just to complete a job. This all requires a lot of capital just to run the day-to-day of a construction business. And if you want to grow that business, you’ll need even more capital.

As any construction business owner knows, the best way to get a job done is through savvy investments. 

If the money isn’t flowing into your company or you don’t have a lot of extra cash on hand, you’ll need to turn to other sources for financial support. Two of the most common options a business in the industry will have are construction factoring and small business loans.

Let’s take a look at both to see which might be the better option.

Skilled people working in construction site. Hispanic man at work in new house. Portrait of happy latino worker using manual forklift to move hardware and smiling at camera. concept: construction factoring

Construction Factoring

One option businesses have for financing is called construction factoring. With this option, a company will use its outstanding and unpaid invoices to obtain financing from lenders. 

Financial institutions that offer construction factoring will use the unpaid invoices themselves to serve as the collateral for the loan. You’ll receive money on the spot before the invoice is even paid.

In general terms, the lender will pay the business anywhere from 70% to 80% of what the outstanding invoice is.

The lender will then be responsible for collecting the unpaid invoice. Once the company collects the invoice, it will give the construction business the remaining 20% to 30% of the invoice, minus a fee.

In general, construction factoring is great for businesses that need cash quickly and can’t wait to collect on invoices. It’s a solid option for companies that have a large number of invoices, too, since it can help with cash flow.

The downside to construction factoring is that it can be quite expensive. Some construction factoring companies will only front a large amount of money. Some will also have very high rates.

If your company is on top of its collections but still needs money, construction factoring isn’t a great option because you have no outstanding invoices on which to get advanced funding.

There are two main types of construction factoring. 

Spot factoring

The first is called spot factoring. In this case, a construction company will be using one or several invoices for a single transaction. You get money right then and there (or “on the spot”) but don’t plan to have a long-term financial relationship with the lender. 

This option is often the more expensive option since the cash is needed with short notice.

Contract factoring

The second type is called contract factoring. This is for larger-scale lending, where several invoices are involved over a long-term period. Contract factoring is used for a contract the construction company has with another company and is paid on a semi-regular basis, such as monthly or quarterly.

Contract factoring will give the construction company consistent cash before each of the regular invoices are collected. The rate for this type of construction factoring is often not as high, since there are a larger number of invoices involved.

The yellow toy bulldozer with pile of coins against blurred background for saving money, investment, business and finance. concept: construction factoring

Small Business Loans

The other main option for construction companies is to get a small business loan. Unlike construction factoring, small business loans don’t rely on outstanding unpaid invoices to make a determination of whether a company is worthy of financing.

What this means is that small business loans can be a great fit for any size business. 

In other words, startups or newer companies that don’t have a lot of outstanding invoices yet can still get the financing they need to grow. 

There are a lot of pros to getting a small business loan for your construction company. With most financial institutions, you may be able to qualify for up to $400,000 to fuel investments of any kind. The interest rate you’ll be charged is often affordable.

While some financial institutions will require you to have a Social Security number and credit history to be approved, others don’t. They accept ITINs and even lend to companies without a long credit history.

Construction Factoring vs Small Business Loans: features

There are some similarities and some differences between construction factoring and small business loans. When it comes to the features of these two financing types, the best way to understand the features is through a table comparison:

💰TenureLoan amountFunding time
Construction factoringUntil the invoice is paid (usually 30 days)Up to 80% of outstanding invoicesIt’s usually very fast (3-5 days)
Small business loan12-60 monthsUp to $400,000Depends on the lender, could be more than 1 week.

*With Camino Financial, you can get your loan in as fast as 2 days.

Construction Factoring vs Small Business Loans: requirements

Each of these two financing options for construction businesses have different requirements for obtaining the needed cash, too. Again, the best way to break down these requirements is through a table comparison:

💰Months in businessCredit scoreCollateralITIN accepted?
Construction factoringMore than 2 yearsN/A in most casesOutstanding invoicesN/A in some cases
Small business loanAt least 9 monthsN/A in some casesNoN/A in some cases

*Camino Financial doesn’t require a credit score and accepts ITIN!

Construction Factoring vs Small Business Loans: differences and similarities

As you can see above, there are some similarities and some differences between construction factoring and small business loans.

small business loans vs construction factoring, venn diagram, infographic, camino financial

What’s the Best Option?

Construction businesses have options when it comes to financing, with construction factoring and small business loans being two of the most popular choices. While construction factoring can be useful in certain situations, they are much more restrictive and less helpful than small business loans.

Factoring can only help front cash the business was already going to collect. Loans, though, can be used to fund investments that can help the business take the next step forward.

At Camino Financial, we offer some of the best rates and most favorable terms for construction businesses that need cash. 

  • Our loans range from $5,000 to $400,000
  • We don’t require you to have an SSN, you can apply with an ITIN
  • You don’t need to have a previous credit history
  • We don’t ask for collateral
  • Applying with us doesn’t hurt your credit score
  • You can receive your capital as fast as 2 days 
  • After 9 timely payments, you can graduate to a better loan

We work hard every day to live up to our motto of “No Business Left Behind.” We do this through our small business loans and by supporting all of our customers. If you’re a construction business that’s in need of funding…

Request a quote for a business loan with Camino Financial today.


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