Sometimes — factoring turns tomorrow’s invoice into today’s cash, and in construction the holdback portion usually cannot be factored at all.
Short answer
Factoring can make sense when growth is outpacing available credit, but the holdback portion of a construction invoice is generally not collectible enough to factor, which shrinks the pool of eligible receivables more than contractors often expect.
Factoring means selling an invoice, or a batch of them, to a third-party factor for a discounted advance today instead of waiting for the customer to pay. The factor collects from the customer directly, or the contractor repays once the customer pays; the cost is the discount taken off the face value, not interest in the loan sense. It is a transactional, invoice-by-invoice arrangement rather than an ongoing credit relationship.
The withheld slice of a construction invoice generally is not “due” yet, both under provincial lien legislation and, separately, s.168(7) of the Excise Tax Act, which delays the GST on holdback until it becomes payable. A factor is realistically only interested in advancing against the collectible, non-holdback portion of an invoice — reasoned from those mechanics rather than stated by any factoring provider, since none publishes a Canadian rate schedule we could verify. That materially shrinks how much of a construction invoice is actually factorable.
A bank operating line comes with a financial-reporting obligation attached to the whole relationship, plus a fixed charge coverage ratio tested against the business as a whole. Factoring carries no covenant to trip, but it is priced invoice by invoice rather than as a standing facility, so the two are not really substitutes — one is ongoing credit against the balance sheet, the other is a sale of a specific asset. Whether the business has the financial statements a bank wants to see is often the deciding factor in which one a contractor can even access.
When growth is outpacing available bank-line room, when a customer has strong credit but slow payment habits, or when the business does not yet have the track record or statements to qualify for a larger conventional facility.
It is generally structured as a sale of the receivable rather than a loan, which is part of its appeal to a contractor already carrying bank debt with its own covenants — but the accounting treatment depends on the specific agreement, so confirm it with your accountant before assuming it stays off the balance sheet.
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