Construction funding: mobilisation, retainage and the gap the bank will not fill

Construction cash flow runs backwards from the way most lending is designed. You mobilise, buy materials and pay crews before you can bill anything. You bill in arrears against work already done. Then a percentage of every payment is withheld until long after your part of the job is finished. Between those three facts sits the working capital requirement that most contractors are actually trying to fund.

The four holes, and they are not the same hole

Each hole wants a different instrument. The common mistake is funding all four with one.

Why lenders read construction differently

Three things make an underwriter cautious about this trade specifically.

The receivable is conditional. A payment application can be revised downward after submission. Backcharges, delay claims and cleanup costs get set against it. Under the general rule at UCC 9-404 an assignee of a receivable takes it subject to the defences the account debtor could raise, so a dispute follows the invoice wherever it is sold.

Work in progress is not a balance-sheet asset a lender likes. Costs incurred and not yet billed sit in a percentage-of-completion calculation that depends on your own estimate of cost to complete. An underwriter reading a contractor's financials spends most of its time on that estimate, on over- and under-billings, and on the job schedule behind them.

And revenue is lumpy by contract, not smooth by month. One job can be most of a year.

Lien rights are part of your credit standing

Mechanics' lien and, on public work, payment bond claim rights are the strongest collection tools most contractors have, and they are procedural. Preliminary notices, notice deadlines and filing windows are set by state statute and are unforgiving; miss the notice and the right is generally gone regardless of the merits. Deadlines, who must be served, and whether a preliminary notice is required at all vary substantially by state and by tier. Treat the notice calendar as a financial control, not paperwork, and check the current requirements in each state you work in.

A lender or factor evaluating you will notice whether you preserve these rights routinely. It is a direct read on how likely you are to be paid.

Bonding capacity and the debt you take

If you bid bonded work, your surety is effectively a second underwriter with a different appetite. Surety analysis leans on working capital and tangible net worth, on the quality of your work-in-progress schedule, and on your character and continuity. Debt affects that in ways that are not always obvious:

• A term loan that finances equipment can be neutral or positive if it moves a cash purchase off the working capital line and matches the asset's life.
• Short-term debt with a daily or weekly repayment reduces working capital immediately and reads as stress.
• Financing that files a blanket lien on all assets can conflict with the surety's expectations and with a bank's existing position.

Tell your surety before you take on financing, not after. A surprise on the schedule is worse than the debt itself.

Products that fit each hole

What to have ready

• A work-in-progress schedule with costs to date, cost to complete and billings to date
• Aged receivables and aged payables, both with retainage shown separately
• The last two or three years of financial statements, ideally reviewed
• Your bonding letter and your surety's contact
• Executed contracts and schedules of values for the jobs being funded
• Your contractor licence details for each state you work in
• Certified payroll where the job requires it

What to refuse

Refuse to fund mobilisation with a daily-repayment advance. Mobilisation cash comes back on the draw schedule, and a daily obligation against a job that will not pay for six weeks turns a funding gap into a default. Refuse a blanket lien on all assets without checking it against your surety's indemnity agreement and any existing bank security. And refuse to let a factor or lender contact your general contractors without agreeing in advance who they speak to and what they say — in this trade, an aggressive verification call can cost you the next contract.