Why does growth create a cash crunch?
Growth eats cash because you pay for the work long before your customer pays for it. A new contract means hiring, buying materials and running payroll for 30, 60 or 90 days before the first check arrives. The bigger and faster the win, the deeper the hole.
Here’s the math on a modest win. A new customer adds $200K a month in billing on net 60 terms, with 70% of that going to labor and materials. You spend about $140K a month before collecting anything, and you’re roughly $280K to $420K out of pocket before payments catch up. A $250K bank line, already half drawn, can’t carry that. The cash gap calculator will show you your own number.
| Customer terms | Monthly cost to deliver (70%) | Approximate peak cash need |
|---|---|---|
| Net 30 | $140K | About $140K–$210K |
| Net 45 | $140K | About $210K–$280K |
| Net 60 | $140K | About $280K–$350K |
| Net 90 (common with large corporates) | $140K | About $420K–$490K |
Why won’t my bank just raise my line?
A bank sizes your line on last year’s numbers, not next year’s contracts. Most bank lines are tied to historical revenue, profitability and a borrowing base set at the last renewal. A contract that doubles your revenue is exactly what makes a credit committee nervous: higher concentration, thinner equity relative to sales, and execution risk.
Even when the bank says yes, it often takes 60 to 90 days and new financial statements. By then the contract has started. Factoring is built for the opposite pattern. It looks forward at who you’re billing, not backward at what you earned. For a fuller side-by-side, read factoring vs. a line of credit.
How does factoring scale with my sales?
A factoring facility grows automatically as you invoice more, up to its approved limit, because each invoice is its own source of funds. If you bill $300K this month and $600K next month, your availability roughly doubles without a new application. When you approach the limit, a funder can raise it after reviewing the new volume, often in days rather than months.
Three things control how much you actually get: the advance rate (commonly 70% to 90%), the approved credit limit on each customer, and the overall facility cap. A new customer has to be credit-approved before its invoices are eligible. For a large creditworthy company, that’s often a quick check; for a private company with thin financials, it may take longer or come with a lower limit.
What is a concentration limit and how will it affect me?
A concentration limit caps how much of your facility can come from a single customer, commonly 20% to 50% of eligible receivables. It protects the funder from one customer’s slowdown or dispute sinking the whole facility. If your big new contract would make one customer 70% of your receivables, the portion above the limit may be ineligible or advanced at a lower rate.
Limits flex with credit quality. Funders often allow much higher concentration for federal agencies, investment-grade corporations and well-capitalized general contractors. If concentration is your issue, raise it on the first call. A funder that specializes in your industry, such as government contractors or manufacturers, may be comfortable where a generalist isn’t.
| Customer type | Typical concentration tolerance |
|---|---|
| Federal agency (with assignment of claims) | Often high, sometimes most of the ledger |
| Investment-grade public company | Often 40%–60% or more |
| Large private company with strong payment history | Often 25%–40% |
| Smaller private company or new relationship | Often 10%–25% |
What if I need cash before I can invoice?
Factoring funds invoices, so it can’t pay for materials you need before the work ships. For that gap, purchase order and inventory financing pays your supplier directly against a confirmed customer order, and the factoring facility takes over once you deliver and invoice. Distributors and manufacturers use the two together on big orders.
For service businesses like staffing and security, the up-front cost is payroll. Weekly invoicing with fast advances usually solves it: you bill Monday for last week’s hours and fund payroll Friday. Payroll funding is built around exactly that cycle.
How do I size the facility I’ll need?
Size the facility for where your receivables will be at peak, not where they are today. Estimate your monthly billing once the new contract is fully running, multiply by your customers’ average days to pay divided by 30, and that’s roughly your peak receivables. Multiply by the advance rate to see peak availability.
For example, $900K a month in billing with customers paying in about 50 days means roughly $1.5MM in receivables. At an 85% advance, that’s about $1.27MM of availability. Ask for a limit with headroom above that number so you aren’t back at the table in three months. Facilities above $3MM are usually placed as large AR facilities with larger factors or asset-based lenders.
Step by step
- Model the cash gap for the new contractEstimate monthly billing, cost to deliver and the customer’s payment terms to find your peak cash need.
- Check customer concentrationWork out what share of receivables the new customer will represent once the contract is running.
- Gather contract and customer detailsHave the contract or purchase order, customer accounts payable contact and your current AR aging ready.
- Size the facility for peak, with headroomRequest a limit above your projected peak availability so growth doesn’t stall in a few months.
- Add PO financing if you need pre-invoice cashIf suppliers must be paid before you deliver, pair factoring with purchase order financing.
Illustrative scenario
HVAC subcontractor wins a hospital expansion
A mechanical subcontractor doing $6MM a year won a $4.2MM package on a hospital expansion with a national general contractor, billing monthly on pay applications with net 45 terms and 10% retainage. Its $400K bank line was drawn to $300K, and the bank wanted a full year of results before increasing it.
- A $1.2MM factoring facility advancing 80% on approved pay applications, net of retainage.
- A 50% concentration limit for the general contractor given its size and payment record, 25% for others.
- The bank line was paid off from the first funding and the bank released its receivables lien.
- Retainage tracked separately and collected at project closeout.
Outcome: The subcontractor staffed the project without delaying its existing jobs and had availability grow alongside each monthly pay application. Its effective cost averaged roughly 3% of each funded pay application given the general contractor’s 45 to 55 day payment pattern.
A composite example for illustration, not a specific client, offer or promise of terms.
Questions people ask
Can factoring fund a contract that’s bigger than my whole business?
Often, yes, if the customer is creditworthy. Factors focus on the customer paying the invoices, so a large contract with a strong payer can be funded even when your company is small. Expect a concentration limit and closer monitoring of that customer’s invoices.
How quickly can I get funding on a new customer’s invoices?
Once the customer is credit-approved and has received a notice of assignment, invoices are commonly funded within one or two business days of submission. Initial credit approval on a large company can take a few days. Start the approval before the first invoice goes out.
What is a concentration limit in factoring?
A concentration limit is the maximum share of your eligible receivables that can come from one customer, commonly 20% to 50%. Invoices above the limit may be ineligible or advanced at a lower rate. Stronger customers, such as federal agencies or investment-grade companies, usually get higher limits.
Can I keep my bank line and add factoring?
Sometimes, but usually not on the same receivables. Most bank lines take a lien on all receivables, so the bank must release or carve out the invoices being factored. A common approach is for the factor to pay off the line and the bank to keep only equipment or real estate loans.
Does factoring cost more as I grow?
Usually the opposite. Factoring rates often decline as monthly volume rises, because funders price larger and more predictable facilities more aggressively. Ask for a tiered fee schedule that drops as your volume crosses set thresholds.
What if my new customer pays in 90 days or more?
Longer terms increase factoring costs because fees accrue over time, but they also increase your cash need, which is exactly why factoring helps. Model the full cost with the factoring cost calculator. Many owners build some of the financing cost into their contract pricing.