Finance for construction companies

Our current funding partner doesn't take construction companies right now. That's on us, not you. This page won't pass you anywhere, but it will tell you how finance works for a construction business, which products fit the way you get paid, and what they cost, so you can judge any offer you get elsewhere.

The cash-flow shape of a construction business

Construction pays late, pays in part, and pays less than the invoice. You buy materials and pay labour up front, then wait for a valuation, a payment notice and a payment date. Main contractors often agree long terms. For business-to-business deals, an agreed payment date must usually be within 60 days.

Then two things come off the top.

CIS deductions. Under the Construction Industry Scheme, a contractor takes deductions at the standard rate of 20% if you are registered and can be verified, 30% if not, and nothing if you hold gross payment status. The contractor works it out after taking off VAT and materials you paid for directly. A limited company claims the deductions back through its own payroll scheme, by entering them on its Employer Payment Summary so HMRC offsets them against what the company owes. In the meantime your bank receipts are smaller than your invoices.

Retentions. Many contracts hold back a percentage of each payment until practical completion and the end of the defects period. That money is earned but locked, sometimes for a year or more.

There is one protection worth knowing. A clause making your payment conditional on the payer being paid by someone else ("pay when paid") is ineffective under the Construction Act, unless that third party is insolvent.

Which finance fits, and which doesn't

• Invoice finance fits contractors with approved applications for payment, but construction invoices are harder to fund than most: valuations get disputed, contra-charges appear, and retentions are often excluded. Expect a lower advance rate than a wholesaler would get.
• Asset finance suits plant, vans and tools. The asset secures the deal, so it is usually the cheapest money a contractor can raise for kit.
• Revolving credit facility fits the gap between paying for materials and getting paid, if you can get one.
• Business loans fit a planned purchase, such as a yard or a second crew's set-up costs.
• Merchant cash advances rarely fit. Construction customers don't pay by card, so there are no card takings to collect from, and fixed daily debits against lumpy receipts are a poor match.

What it costs: a worked example

Say the company borrows £100,000 at 18% APR over 24 months, repaid monthly.

• Monthly repayment: £4,992.41.
• Total repaid: £119,817.84.
• Interest: £19,817.84.

Sterling's rule of thumb calls 18% "priced like bank lending". Now run that £4,992.41 against your worst month of receipts, after CIS, with your largest customer paying at 60 days. If it still clears, the loan fits. The repayment calculator on this page lets you change the rate and term.

What funders typically ask a construction company for

• Filed accounts and recent management accounts, with a work-in-progress schedule.
• Bank statements showing receipts against applications for payment.
• An aged debtor list, including retentions and when they fall due.
• Contracts or orders for the main jobs on the books.
• CIS statements, so the funder can see deductions waiting to be recovered.

A personal guarantee from directors is common.

Red flags specific to construction

1. Finance sized on invoices, repaid from receipts. If an offer assumes you are paid in full on the invoice date, the repayment schedule is built on money you won't have.
2. Retentions counted as cash. Funding that relies on a retention being released on time relies on someone else's snagging list.
3. Concentration on one main contractor. If one customer is most of your ledger, their payment run is your cash flow. Funders know this and price for it.

Limited companies only

Many trades run as sole traders, and that's fine. Ask Sterling can only work with limited companies, because introducing sole traders and small partnerships is regulated credit broking. For limited companies, business finance is not regulated by the Financial Conduct Authority, so read each agreement carefully.