Using invoice factoring to fund a large new contract comes with real pros and cons, and most of them turn on timing. A factor buys invoices for work you've already delivered, so it pays for the wait after you bill, while the hiring, materials and first payroll that come before invoice number one need another source. Below, we test the fee against gross margin at 30, 60 and 90 days and work out the peak cash gap on a contract that doubles monthly sales.
What factoring pays for on a new contract, and what it leaves out
Factoring is the sale of a receivable, and what a factor buys in practice is an invoice for work that's been delivered. The Business Development Bank of Canada draws the line in the same place: purchase order financing "provides funds to pay suppliers or cover production costs before you deliver an order," while invoice factoring "gives you access to cash after you've delivered goods or services and issued an invoice to your customer" (BDC, read October 6, 2026).
Part of the reason is legal. Under UCC 9-404(a) (uniform text on Cornell LII, read October 6, 2026, and each state enacts its own version), unless the customer has made an enforceable agreement not to assert defenses or claims, the buyer of a receivable takes it subject to "all terms of the agreement between the account debtor and assignor and any defense or claim in recoupment arising from the transaction that gave rise to the contract." If the work isn't finished or accepted, your customer may have grounds to withhold payment, and as we read the section, it can raise them against the factor too. So factors commonly fund only billed, delivered work, and many confirm a large invoice with the customer before advancing. Ramp-up hiring, materials and the first weeks of payroll come due before there's an invoice to sell, so factoring doesn't reach them.
The pros and cons of using invoice factoring to fund a large new contract
| Pros | Cons |
|---|---|
| Funding grows with billing, because each new invoice can be sold | Nothing funds until the first invoice exists |
| Factors usually weigh your customer's credit heavily, which helps a small company with a strong buyer | The fee comes out of gross profit on every invoice and grows the longer the customer takes to pay |
| No fixed monthly payment, since the customer's payment settles the advance | Your customer is usually notified and, after that notice, generally can discharge the debt only by paying the factor (UCC 9-406(a), uniform text, with exceptions) |
| A dominant customer that would trip a bank's concentration limit may still be fundable | Factors commonly cap credit per customer, and factoring agreements can carry minimums, term commitments and recourse |
Factoring tends to make sense for financing a new contract when four things line up: the customer is creditworthy, the invoices are for completed and accepted work, payment terms run about 30 to 90 days, and your gross margin can absorb the fee. It's a poor fit when the cash is needed before delivery, when margins are thin, or when the contract lets the customer hold back or offset payment.
Will factoring fees eat your margin at 30, 60 and 90 days?
Each factor sets its own pricing, so rerun this test with your own quote. Our assumption is a fee of 1.5% of the invoice for each 30 days, or part of 30 days, it's outstanding. That figure shows the arithmetic and isn't a market rate.
The test is one division: the fee as a percent of the invoice, divided by your gross margin, equals the share of gross profit the fee takes.
| Customer pays in | Assumed fee | Fee on a $150,000 invoice | Gross profit left at a 25% margin | Share of gross profit used at 25% | Share used at 10% |
|---|---|---|---|---|---|
| 30 days | 1.5% | $2,250 | $35,250 | 6% | 15% |
| 60 days | 3.0% | $4,500 | $33,000 | 12% | 30% |
| 90 days | 4.5% | $6,750 | $30,750 | 18% | 45% |
At a 25% margin, the 60-day fee leaves 22.0% of revenue as gross profit. At 10%, it takes nearly a third of gross profit at 60 days and close to half at 90.
A customer on net 60 that pays in 75 days lands in the 90-day row under this fee structure. Ramp-up costs come out of the same profit too: over 12 months, the example contract below bills $1,800,000 and earns $450,000 of gross profit. Subtract $40,000 of ramp-up cost and $54,000 in fees for factoring every invoice at 60 days, and $356,000 is left, about 19.8% of revenue. Our factoring rates and fees guide covers the other charges.
The peak cash gap on a contract that doubles sales
Every figure here is our assumption. A company billing $150,000 a month wins a contract worth another $150,000 a month. Gross margin on the new work is 25%, so direct costs are $112,500 a month, paid as the work is done. Ramp-up costs $40,000 before work starts. Each invoice goes out at month end and is paid 60 days later, counted here as two months. The factor advances 85% ($127,500) on the invoice date, a simplification because setup and invoice verification can delay a first advance, and releases the remaining $22,500, less the $4,500 fee, when the customer pays. The table counts only the new contract's cash, and each lowest point is the running total after that month's costs and before any month-end advance or payment.
| Month | Lowest point, no factoring | Month end, no factoring | Lowest point, with factoring | Month end, with factoring |
|---|---|---|---|---|
| Ramp-up | -$40,000 | -$40,000 | -$40,000 | -$40,000 |
| 1 | -$152,500 | -$152,500 | -$152,500 | -$25,000 |
| 2 | -$265,000 | -$265,000 | -$137,500 | -$10,000 |
| 3 | -$377,500 | -$227,500 | -$122,500 | +$23,000 |
Factoring cuts the peak gap by $225,000, from $377,500 in month 3 to $152,500 in month 1. What remains is the ramp-up cost plus the first month of direct costs, the money that goes out before any invoice exists.
Contract terms that make the invoices factorable
No rule sets what a factor must buy, but the eligibility lists that bank examiners and the SBA publish for receivables lines show what funders worry about, and factors commonly screen for similar things. The table draws on the OCC's Asset-Based Lending booklet (Version 1.1) and SBA's SOP 50 10 8.1 (effective October 1, 2026), both read October 6, 2026.
| Contract term to read | What funders look for | Where it's written down |
|---|---|---|
| Delivery and acceptance | Invoices for finished, accepted work | The OCC lists unbilled accounts receivable as commonly ineligible. SBA excludes bill-and-hold, sale-on-approval and consignment receivables from a Working Capital CAPLine |
| Offsets and chargebacks | No customer right to deduct what you owe it | The OCC notes that a customer you also buy from can set off the debts and "pay only the net amount." SBA excludes an account "subject to any adjustment, deduction, defense, dispute, or counterclaim" |
| Progress or milestone billing | Sign-off on each milestone before funding | Market practice, often a lower advance or none until approval |
| Payment terms | Terms that match how the customer pays | SBA excludes receivables due more than 180 calendar days from the invoice date unless backed by acceptable letters of credit or credit insurance |
| Assignment clause | The right to assign, or the customer's consent | UCC 9-406(d) makes a term that bans or requires consent to assigning an account generally ineffective in the uniform text, with exceptions, and states enact their own versions. Federal contracts follow the separate conditions in FAR 32.802 |
Concentration is the last screen. From month 2 of the example, the new customer always owes $300,000. If existing customers pay in 30 days and owe $150,000, one customer is two thirds of your receivables. The OCC booklet says a bank normally treats receivables as concentrated when single accounts are 10 percent or more of the portfolio. SBA's Working Capital CAPLine rules say accounts from one customer above 20% of total outstanding receivables "should not be included in the eligible borrowing base" unless one of five conditions applies, such as a Federal government account or a long-standing positive credit history with the borrower. Otherwise the lender needs SBA's prior written consent to include the account. Factors more often set a credit limit per customer, so ask what limit they'd put on this one before you sign.
When purchase order financing, a Contract CAPLine or a line of credit fits better
| When the cash is needed | Option | What to know |
|---|---|---|
| Before delivery, to pay suppliers on a confirmed order for goods | Purchase order financing | Mostly for physical goods. In Canada, BDC says it finances up to 90% of the order value, excluding taxes, deposits and other payments received from the buyer, subject to approval |
| Before invoicing, for labor, materials and overhead on a specific contract | SBA Contract CAPLine, through an SBA lender | Up to $5,000,000, maximum maturity 10 years, and a line that finances a single contract should have a maturity tied to the contract completion date. Proceeds can't cover mark-up or profit, fixed assets, or a contract in which significant performance has already begun |
| Before invoicing, at no financing cost | Deposit or mobilization payment from the customer | A term you negotiate, so ask before you sign |
| After invoicing, with solid financials and a spread of customers | Business line of credit | Often costs less than factoring, but concentration limits can leave the new customer out |
The SOP sizes a Contract CAPLine for a single contract with multiple payments at the amount projected to cover "20% over the greatest cash deficit projected for the subject contract." In our example that deficit is $377,500, so the figure would be $453,000 if every cost in it qualifies. The SOP requires a first lien for the lender on the contract and its proceeds, by assignment unless an exception applies, so as we read it, the same invoices typically can't also be sold to a factor. Lenders assess credit and repayment ability, and approval and terms vary.
EQ Funding isn't a lender. One application goes to a network of lenders and factors that compete for your business, so you can put an invoice factoring quote and a line of credit through the same margin test.