Why construction businesses struggle with standard finance
Construction is one of the most cash-hungry sectors in the UK economy. A contractor or subcontractor pays wages weekly, buys materials on 30-day terms and runs plant every day, but is paid monthly against valuations that can take weeks to certify and may be reduced by pay-less notices, contra charges or set-off. A slice of each payment is held back as retention for a year or more.
Most general invoice finance providers are not set up for this. They expect a completed delivery and a simple invoice, so they either exclude construction altogether or lend only against final accounts, which leaves the real working capital need unfunded. Banks, meanwhile, often lend on historic profit and property and are cautious about contractors after a string of high-profile failures.
How construction invoice finance works
Construction invoice finance is built for contract billing. Specialist lenders understand interim applications for payment, the certification process and the rights each party has under the contract. They advance up to 90% of eligible certified applications as soon as they are approved, and a small number will fund a share of applied but uncertified work where payment history is strong.
Before agreeing a facility, the lender reviews your contract terms, payment record and the strength of the contractors you work for. Retentions, disputed amounts and contra charges are usually excluded from the borrowing base or advanced at a lower rate, which is why an honest debtor report that separates them matters.
Certified versus uncertified applications
A certified application has been valued and approved by the contract administrator or main contractor and is payable on the due date, subject to any valid pay-less notice. An uncertified application is still a claim. Lenders are naturally more comfortable with certified debt, so a quick certification process with your customers is one of the most effective ways to increase what you can borrow.
Asset based lending for larger contractors
Contractors with a larger debtor book and a substantial fleet often benefit from an asset based lending facility, from £2m to £120m. It is one revolving credit facility with a single borrowing base: certified debtors at up to 90%, plant and machinery at up to 85% of net orderly liquidation value and any owned yard or depot at up to 80% of market value, with plant and property as term loans inside the facility. Pricing starts from 2% over Bank Rate on the receivables line, on 3 to 5 year committed terms. That gives more headroom than invoice finance alone and a single relationship to manage. Asset finance on new machines and bonding lines sit alongside it as separate facilities.
Plant and machinery finance and refinance
Plant is usually the second largest use of cash in a contracting business. Hire purchase and leasing fund up to 100% of the cost of new and used machines over two to seven years, so cash stays available for labour and materials. Where you own plant outright, a refinance can release up to 85% of its net orderly liquidation value as working capital, often in a few weeks, amortising over 3 to 5 years.
Lenders value plant on what it would fetch in a sale, so well-maintained, mainstream machines from established manufacturers attract the best terms. A current asset list with ages, hours and service history makes the process much faster.
Retentions, VAT reverse charge and CIS
Retentions are profit you have earned but cannot spend. On a growing order book they build quickly, and late release is one of the most common causes of cash strain in the supply chain. We include retentions in the cash flow forecast and, where the lender allows, in the borrowing base, and we look at whether retention bonds could replace cash retentions on new contracts.
Since the VAT domestic reverse charge came in, subcontractors no longer receive VAT from contractors on most work, removing a cash buffer many relied on. CIS deductions are also taken at source. A good facility takes both into account so the business is not short when PAYE, CIS and VAT returns fall due.
Contract funding and mobilisation
Winning a large contract is often the moment a contractor is most stretched. Labour, materials, site set-up, welfare and plant all have to be paid for before the first valuation is certified, and on a new customer the first payment can take six to eight weeks. Contract funding provides short-term working capital for a specific job, drawn as costs are incurred and repaid from valuations as the programme runs.
Lenders look at the contract terms, the employer and main contractor, the programme and the cost plan. Labour-only subcontractors need less funding than supply-and-fit trades, because they do not carry materials, but they are more exposed to wage rises and to a contractor delaying payment. We size the facility to the real cost curve of the job, not a flat percentage of contract value.
Acquisitions and management buyouts
Specialist trades, building services firms and civils contractors change hands regularly, often when a founder retires. Lenders will fund acquisitions and buyouts where the order book, customer relationships and key staff transfer with the business. A typical structure combines an acquisition term loan at up to 5x sustainable EBITDA with, from £2m, an ABL facility across the combined debtor book and the acquired fleet, or a construction invoice finance line and plant refinance for smaller deals. We advise on the transaction and run the debt process end to end.
Bonds and guarantees
Public sector and larger private contracts usually need a performance bond, typically 5% to 10% of the contract value, and sometimes advance payment or retention bonds. If a bank provides them, they often reduce your available overdraft or require cash security. Specialist sureties can provide bonding lines separately, preserving bank headroom for working capital.
What makes a construction deal fundable
Property development is a different type of funding, assessed on the scheme rather than the contractor, and we cover it through our property finance team. For contractors and trades, we help pull the contract information together and present it in a credit paper that a construction lender recognises.
- Monthly management accounts with contract-level margins
- An aged debtor report that separates applications, certificates and retentions
- Standard forms of contract, or clear schedules of amendments
- A healthy spread of customers with a good payment record
- Up-to-date HMRC, including CIS, PAYE and VAT
- A current plant list with valuations or recent invoices