What is contractor payroll financing, how does it work, and what does it cost in 2026?
Payroll financing advances cash against unpaid contractor invoices so you can pay crews while general contractors pay slowly. Costs, options and 2026 rates explained.
Payroll financing advances cash against your unpaid invoices so you can pay crews while general contractors pay slowly. Factoring funds 80%–95% of an invoice within 24–72 hours; construction factor rates run about 3%–5% per 30 days. Lines of credit and SBA loans are cheaper alternatives.
Contractor payroll financing covers crew wages when slow-paying general contractors leave you short of cash. The most common form is payroll factoring: you sell an unpaid invoice to a funder, which advances most of its value within a day or two, then collects from your customer. Other routes are a revolving line of credit or a short-term working-capital loan. Pricing on factoring runs roughly 1%–5% of invoice value per 30 days, with construction toward the higher end.
The core problem is a timing gap. You owe payroll weekly or biweekly, but a commercial job might not pay for 30, 60, or 90 days. Financing bridges that gap so the crew stays paid and the job stays staffed.
How payroll factoring works
Factoring is not a loan. You submit an approved invoice (often with crew time cards), and the funder advances a percentage immediately. Advance rates are typically 80% to 90%, with some factors advancing up to 95% for high-quality receivables. The remaining slice, usually a 10% to 20% reserve, is released after your customer pays, minus the fee. Funds typically arrive by wire within 24 to 72 hours. Because approval rests on your customer's credit rather than yours, factoring suits contractors with thin files but strong general-contractor clients. See our invoice factoring guide for the full mechanics.
What it costs in 2026
The headline price is the factor (discount) rate. Across industries it typically ranges from 1% to 5% of the invoice face value per 30 days. Construction sits at the high end — one 2026 breakdown puts the sector at 2.5% to 5.0%, higher due to retainage and dispute risk, and another cites 3% to 5% per 30 days for construction because of retainage holdbacks and complex lien structures. A worked example: a plumbing subcontractor factoring $150,000 monthly at 3.5% over 2.5 months pays $13,125, or 8.75% of the amount factored. Watch for add-ons too — origination, ACH/wire, monthly minimums and lockbox fees stack on top of the quoted rate.
2026 lender options beyond factoring
Factoring is fastest, but not always cheapest. A combination of a revolving line of credit for recurring payroll and short-term project financing for larger gaps works well for most contractors. For cheaper, longer-term capital, an SBA 7(a) loan goes up to a maximum loan amount of $5 million; the SBA's 7(a) Working Capital Pilot caps rates at the base rate +3.0% on amounts above $350,001, rising to base rate +6.5% on loans of $50,000 or less. With the prime rate at 6.75% as of 05/01/2026, that is meaningfully cheaper than factoring annualised — but it is slower to fund. Match the tool to the gap: factoring for speed, a line of credit for recurring payroll, SBA for planned, larger needs. Compare alongside our working capital guide.
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