Construction GC bridged 90-day payment gap on $2.3M project using AR factoring

Background

The general contractor is a closely held Texas S-corp with 17 employees and a 12-year operating history in commercial tenant-finish and small ground-up. Trailing-twelve-month revenue at the time of the project award was $11.4M with a 14.6% gross margin and 6.8% net. The owner holds 70%; a long-tenured project manager holds 20%; the remainder is held by an investor who put in startup capital in 2014.

Pre-deal capital structure was conservative for a GC of this size: a $750K bank line of credit secured by accounts receivable (at the time, drawn $310K), a $145K equipment note on a fleet of three vehicles and yard equipment, and standard trade-credit relationships with two material suppliers on net-30 terms. Personal credit on the principal was 731; the company carried clean bondable status with a $5M aggregate program from a regional surety.

The new project: a $2.3M ground-up retail strip-center build for a mid-sized regional developer with strong financials. AIA G702/G703 monthly draws against percent-complete, with the developer paying net-90 from each approved draw and retaining 10% retainage held to substantial completion. Standard for the region; brutal for cash flow on a sub-$15M-revenue GC.

Challenge

Running the cash-flow waterfall, the GC modeled peak negative working capital exposure of $1.4M in months 4 through 6 of the project — the window between when subs and suppliers required payment (mostly net-30 from invoice receipt) and when the developer's 90-day payment cycles on the corresponding draws cleared. The existing bank LOC could absorb roughly $440K of incremental draw, but no more — the bank had explicitly capped advances against this customer because of the long payment terms.

Three bad paths were on the table. (1) Take the project but funded with MCAs to bridge the payroll/sub gaps — modeling suggested $1.1M of MCA principal would be needed across stacked positions to cover the peak gap, at a blended ~62% APR-equivalent, eating roughly $190K of project margin and leaving the company with a UCC overhang for 18 months after project close. (2) Decline the project, which meant losing the relationship with a developer who had a five-project pipeline through 2027. (3) Take a smaller scope of work within the project, sacrificing scale leverage.

None of the three was acceptable. The GC came to Fundnode looking for option four.

Decision process

Construction AR factoring is its own sub-product, structurally different from generic AR factoring or trucking factoring. The factor underwrites against the developer's credit, the AIA G702/G703 draw mechanics, and the GC's pay-when-paid agreements with subs. Advance rates are lower (typically 70–80% on construction draws vs 90%+ for trucking) and rates are higher (typically 1.5–3% per draw vs 0.8–2% for trucking) because of mechanic's-lien complexity and longer pay cycles.

We screened the deal against five construction-friendly factors. Two declined upfront — the developer-customer was new to them and their underwriting required two prior on-time pay cycles before they would factor at scale. Two priced uncompetitively (3.4% per draw plus a 0.75% monthly facility fee). The fifth — a specialty construction factor with prior experience funding this specific developer — quoted 2.3% per draw with a 75% advance rate, no facility fee, and a $2M committed line for the duration of the project.

The economics: at 2.3% per draw across an average 90-day cycle, the implied APR-equivalent is roughly 9.4% — versus the ~62% APR of the MCA-stack alternative. Over the project life, total factoring cost modeled at $54,000 against $94,000 in MCA cost on the smaller MCA-bridge scenario (which would not have fully covered the gap anyway).

Two structural details mattered. The factor required a true-sale opinion from counsel (cost $4,200, one-time) and an inter-creditor agreement with the existing bank LOC lender to clarify lien priority on accounts receivable (took 22 days to negotiate). Both delayed first funding by roughly five weeks — manageable because the project pre-construction phase absorbed the delay.

Outcome

The factoring line funded same-week on every approved draw across the 9-month build. Peak outstanding hit $1.38M in month 5 of construction, in line with the original cash-flow model within 1.4%. Total factoring fees over the project life came in at $51,800 — modestly under the $54,000 model because two draws were paid in 71 and 74 days respectively (the developer occasionally paid ahead of net-90).

Final project margin came in at 14.2% — within 40 basis points of the original bid margin of 14.6%. The $51,800 factoring cost was absorbed in the original bid as a financing-cost line item. The MCA-bridge alternative would have produced a roughly 6% net margin after factor-rate erosion.

Post-project: the bank LOC remained available throughout, drawn only $290K at peak (down from $310K pre-project). The factor closed the line on substantial completion at the GC's request — they intend to keep it dormant and reactivate for the next net-90 project from this same developer. The developer has now signed two follow-on projects with the GC. Zero MCA UCCs were filed; bondable status was preserved for the surety relationship.

Lessons learned

• Construction AR factoring is a different product than generic AR factoring — only specialty factors with G702/G703 experience can underwrite it.
• Inter-creditor agreements with the existing bank lender are usually required and add 3–6 weeks to first funding. Build the timeline in.
• An MCA on a 9-month construction project compounds across multiple renewals; the all-in cost is rarely modeled correctly in the bid.
• Surety relationships break the moment an MCA UCC hits. If you are bondable, treat that status as a binary asset to protect.
• Factor against the developer's credit, not yours — that is the whole point of the product.

Related reading

• Invoice factoring product overview
• Construction MCA during material cost volatility
• MCA stacking recovery program
• Find your funder match