Construction business funding, before the first draw.

How construction companies actually get paid

Commercial and larger residential work is rarely paid on completion. It's paid through progress billing:

1. The contract sets a schedule of values, breaking the job into line items.
2. Each month you submit a pay application for the work completed, often on standard industry forms, with lien waivers.
3. The owner, architect or lender reviews and approves it, which can take weeks.
4. The owner pays the general contractor, who pays subcontractors. Many subcontracts include pay-when-paid terms, so a sub waits for the GC to be paid first.
5. A portion of each payment, commonly five to ten percent, is held as retainage until the project is substantially complete or closed out.

Put together, a subcontractor might wait 45 to 90 days from starting work to the first check, and much longer for retainage. Change orders, which are work you've done but haven't been approved for yet, can lag further still.

The front-loaded cost of every new job

Meanwhile, costs start on day one. Crews are paid weekly. Materials are bought or committed to before they're installed. Equipment rental, permits, insurance and bonding costs come up front, and mobilization (getting people, trailers and machines on site) costs money before a single line item is billable. The better your year, the more jobs you're carrying at once, and the bigger that gap becomes.

Why weekly payments often suit contractors

A contractor's bank statement typically shows a few large deposits a month, from draws and final payments, and a steady stream of payroll and supplier payments going out. Daily debits on top of that can drain the account between draws. Weekly payments line up with how you already run payroll and are often easier to plan around. Either way, the total you deliver is fixed before you sign; see how MCA payments work.

Two sizing rules worth following: assume the draw will be late, because it often is, and don't count retainage as cash until it's released.

What an underwriter looks at for a construction company

• Your A/R aging report. Who owes you, including retainage receivable, and how long it has been outstanding.
• Concentration. Whether one general contractor or owner is most of your receivables, and their payment history.
• Every entity and account. Contractors often run separate companies or accounts for different work; include all associated businesses and business bank accounts.
• Seasonality. Northern contractors slow down in winter; tell the underwriter where your recent statements fall.
• Existing payments. Equipment notes and any advances already in place. Second position and onward is our strong suit.
• The basics. Your last three months of statements plus month-to-date, with no more than 5 negative-balance days a month on average.

When a construction company should use something else

• Heavy equipment. An excavator, skid steer or crane you'll run for years belongs on equipment financing, not an advance with a term of up to 10 months.
• Approved invoices from a reliable GC. If the gap is billed work that's simply slow, invoice factoring may cost less.
• A job that was bid too low. Capital can't fix a contract that loses money; it only adds a payment.
• Projects measured in years. If the payoff is a year or more away, a bank line of credit sized to your backlog is the better tool, if you qualify.

Frequently asked questions