Construction invoice finance is a financing solution that provides advanced funds for future payments during construction projects by turning unpaid invoices into cash. This helps firms meet their procurement needs and manage cash flow while offering breathing space for unexpected expenses.
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When it comes to construction, healthy working capital is vital, particularly as unforeseen project delays and late client payments put further strain on finances.
According to a 2024 survey from Creditsafe, 28% of all insolvencies in 2023 in the UK construction sector were due to late payments, with construction firms accounting for 17% of all insolvencies in England and Wales in the year leading up to August 2024.
Invoice finance can relieve some of the pressure, giving you access to the full amount of invoices owed or due later in your projects (minus the provider’s fees).
Construction invoice finance is a financing solution that provides advanced funds for future payments during construction projects by turning unpaid invoices into cash. This helps firms meet their procurement needs and manage cash flow while offering breathing space for unexpected expenses.
When it comes to construction, healthy working capital is vital, particularly as unforeseen project delays and late client payments put further strain on finances.
According to a 2024 survey from Creditsafe, 28% of all insolvencies in 2023 in the UK construction sector were due to late payments, with construction firms accounting for 17% of all insolvencies in England and Wales in the year leading up to August 2024.
Invoice finance can relieve some of the pressure, giving you access to the full amount of invoices owed or due later in your projects (minus the provider’s fees).
Invoice financing is a financial arrangement between a business with outstanding invoices and an invoice financing or factoring company, where businesses get invoices paid in advance by a third-party provider. This provider then takes a percentage cut of the invoice value – typically between 10-30% – made up of interest charges on the advance and a management fee.
How the fees and processes work depends on your chosen invoice finance type and provider. Here’s an overview of the main types of invoice finance and how they differ:
In this type of invoice finance, providers are responsible for collecting payments from your customers. Invoice factoring suits construction businesses with smaller financial teams or a large number of projects, who are keen to outsource time-consuming invoice collection tasks.
If your business has a robust credit management operation and prefers to retain control over your sales ledger, you may prefer invoice discounting. This involves directing invoice payments to an account in your name, which is managed by the provider, while they pay you the advance (minus their fees).
Invoice discounting tends to be pricier than invoice factoring but as customers are unaware you’re using invoice finance, it can ease concerns over perception.
Another option available is selective invoice finance which involves choosing certain invoices to be paid rather than all outstanding invoices. Also referred to as spot factoring, this appeals to companies who only need an occasional boost in capital or want more flexibility and less commitment.
You may wonder what happens if a client doesn’t pay for your services. Who is responsible, you or the invoice finance provider? That depends on whether you choose a recourse or non-recourse financing option.
With recourse financing, your company remains responsible if a customer fails to pay an invoice. You agree to take full liability for the invoice you've borrowed against. This reduces the lender’s risk and incurs a lower fee than non-recourse financing.
So, in a non-recourse financing arrangement, the invoice finance provider assumes the liability, relieving pressure on your business. Due to the risk incurred by the lender, this option is more expensive and often requires a higher bar for approval.
Construction companies deal with many moving parts, each presenting risks and challenges, and high upfront costs for materials, labour and subcontractors. As incoming payments are usually staggered, based on various project milestones, this often leads to cash flow problems.
Other factors that impact cash flow include:
Construction invoice finance provides crucial access to funds for businesses that coordinate with numerous suppliers, subcontractors and local operators, where payments for goods and services can be slow. It’s often a simple funding solution that eases cash flow management for construction businesses and relieves pressure on finance teams.
Here are the main benefits of invoice finance for construction companies:
General contractors spin a lot of plates during large construction projects. There are various vendors and subcontractors to manage, and substantial capital is required to procure building materials and machinery and cover labour costs.
Payment timelines for construction project stages can be between 30 and 90 days or even longer, so invoice financing is a good way to boost cash flow.
Construction invoice finance helps general contractors to:
Due to the long wait for payments in telecom and cell tower construction projects, contractors often take out invoice finance agreements to cover upfront costs and prevent potential credit issues.
Invoice finance is suitable for use in telecom tower construction due to:
In property development, the big opportunity is the future value of houses/flats once developed and put on the market. So, in addition to any initial business loans taken out, invoice finance can keep cash flow steady during projects.
Using invoice finance helps property developers to:
So, how does invoice finance compare to other financing options? Companies seeking construction finance to boost working capital can use various funding options, from secured bank loans and unsecured business loans to asset finance and lines of credit.
They all have pros and cons. However, if your main issue is cash flow, then invoice finance for construction projects has several advantages over many other finance options, such as:
When choosing an option for your business, weigh up all the suitability factors and use finance calculators to work out cost-effectiveness compared to loans and other construction finance solutions.
Potential downsides to consider are that invoice finance fees can often prove higher than other forms of business finance and the solution may not give you the level of funds required for large investments. Also, in the case of invoice factoring, some companies aren’t comfortable giving up control of certain elements of customer relationships, such as invoice collection.
There are numerous invoice finance providers available to UK construction businesses, from well-known banking names to reputable alternative business finance providers.
While applying through traditional banks is typically a more drawn-out process, online invoice finance applications are fairly straightforward. In most circumstances, the process will follow these steps:
From there, you’ll receive ongoing communication and support while you provide invoice details as and when required for new and existing construction projects.
Here are some key questions to consider when exploring construction invoice finance providers:
Consider these questions and whether invoice finance is right for your construction business – and if so, which type – before applying.
iwoca is a leading provider of flexible finance solutions for small businesses. We provide a range of short-term loans to power business growth. Your construction company could borrow between £1000 and £1,000,000, get approved within 24 hours and receive funds on the same day.
There are no hidden fees. You only pay interest on the money you draw down and we don’t charge for early repayments. We let you access the capital you need, when you need it, so you manage your cash flow with ease.
