Construction funding: what fits a business paid in draws and retainage

Our current funding partner doesn't take construction or contracting businesses right now. That's on us, not you. This page is still the guide we'd want if we ran a crew: how contractor cash flow actually behaves, which funding fits it, and what each option costs in real numbers.

The cash-flow shape of a contractor

Construction is a business where you pay first and get paid later, in lumps. Materials, equipment rental and payroll go out every week. Money comes in when a draw is approved, and a draw depends on an inspection, a signed pay application and the owner's own funding.

Then there is retainage: a share of each progress payment held back until the work is finished. On federal fixed-price construction contracts, the contracting officer may retain up to 10 percent of a payment until satisfactory progress is achieved. Private contracts set their own terms, and on a long job the retained amount can grow larger than your monthly profit.

If you're a subcontractor, you sit at the end of the chain. On federal work, the prime contractor must pay subcontractors within 7 days of receiving payment from the agency for satisfactory work. Private jobs often run on pay-when-paid terms instead, so you wait for the general contractor, who waits for the owner.

That gives three distinct money problems:

• Mobilization. Materials and labor before the first draw arrives.
• The gap between draws. Payroll keeps running whether or not a pay app has been approved.
• Equipment. Big, long-lived assets that you either own, finance or rent.

Which funding fits, and which doesn't

A line of credit suits construction because you draw it when a pay app is late and repay when it lands. You only pay interest on what you use.

A merchant cash advance is usually a poor fit. It is built for businesses with steady daily card sales. A contractor with three big deposits a month and a fixed daily debit will find the account empty between draws.

SBA 7(a) loans can cover working capital, equipment and real estate, through a participating lender rather than the SBA itself.

On equipment, the IRS lets businesses elect a section 179 deduction instead of depreciation for certain property. Whether it applies to you, and how much, is a question for your accountant, not a sales pitch.

What it costs: a worked example

Say you borrow $100,000 for equipment at 18% APR over 24 months, paid monthly.

• The payment is $4,992.41 a month.
• You repay $119,817.84 in total.
• The interest is $19,817.84.

Compare that with a cash advance. $100,000 at a 1.35 factor over 6 months, paid daily, means $135,000 back in 126 payments of about $1,071.43, which works out to about 126% APR. For a machine you'll use for years, that's the wrong shape and the wrong price. Use the payment calculator on this page to test your own numbers.

What funders typically ask a contractor for

• Business bank statements for recent months.
• An accounts receivable aging report, showing who owes what and how late.
• A work-in-progress schedule: contract values, billed to date, cost to date, retainage held.
• Your contractor license and insurance certificates.
• Tax returns and, for larger amounts, financial statements.
• For equipment: the dealer quote or invoice.

The WIP schedule is the one contractors forget. It is how a funder tells a profitable job from one that is quietly losing money.

Red flags specific to construction

1. Daily debits against lumpy income. If the repayment assumes a steady daily deposit and your money arrives in three draws a month, the plan fails in the first slow fortnight.
2. Borrowing short against retainage. Retainage can sit for months after the work is done. Funding it with a 6-month product means repaying before the money comes in.
3. Liens and blanket filings. Some agreements file a claim over all business assets, which can complicate equipment deals and bonding later. Ask exactly what the filing covers before you sign.

Where this leaves you

Start with your bank and an equipment finance specialist, and price every offer as an APR. Our calculators work whether or not you ever ask us anything.