Funding for construction firms and contractors

Why construction cash flow is different

Construction businesses typically get paid through a cycle of applications for payment against work completed, often on 30 to 90 day terms, with a retention of typically 3% to 5% held back until practical completion and sometimes a further tranche held until the end of a defects liability period that can run a year or more beyond that. This means a contractor can complete work, pay its own subcontractors and suppliers, and still wait many months for the final slice of payment on any given contract, which puts sustained pressure on working capital even on profitable jobs.

Standard invoice finance products are not always designed for this pattern, because applications for payment and retentions are treated differently from standard sales invoices by many funders, so construction specific facilities have developed to address the gap.

Funding against applications for payment

Some specialist funders will advance against certified applications for payment before the formal invoice is even raised, recognising the certification process itself as sufficient evidence of value earned. Others fund against the invoice once raised but exclude the retention element from the advance, since retentions are contingent on future performance and completion rather than being immediately collectable debt.

Where retentions are excluded, some funders offer a separate retention finance facility, advancing a percentage of the retention value once it becomes reasonably certain to be released, which can unlock cash that would otherwise sit tied up for many months after the practical work is finished.

Plant and equipment finance

Contractors that own or need to acquire plant, from excavators to scaffolding to specialist equipment, typically fund it through hire purchase or finance lease rather than outright cash purchase, preserving working capital for the ongoing contract cycle. Because plant generally has an active secondary market and a well understood depreciation profile, lenders are usually comfortable advancing a high proportion of the purchase price, and used or refurbished plant is readily financeable alongside new equipment.

Bonding and guarantee facilities

Many construction contracts require the contractor to provide a performance bond or an advance payment bond, guaranteeing the client against non-performance or misuse of an upfront payment. Providing these bonds requires either cash collateral or a bonding facility from a surety provider or bank, which assesses the contractor's financial strength and track record much as a lender would before agreeing a bonding limit. Contractors bidding for larger public sector or framework contracts should establish a bonding facility well ahead of needing it, since arranging one under time pressure to meet a tender deadline rarely produces the best terms.

Managing subcontractor payment obligations

A main contractor's own cash flow pressure is often compounded by an obligation to pay subcontractors on shorter terms than it is itself being paid by the client, particularly under statutory payment provisions in construction contracts. Supply chain finance arrangements, where a funder pays subcontractors early at a discount while the main contractor repays on its own normal terms, can relieve this pressure without the main contractor needing to draw further on its own facilities, and are worth exploring on larger, multi-subcontractor projects.