2 min read
The working capital problem in construction
Construction contracts almost always require a limited company to spend before it earns. Materials must be purchased, subcontractors engaged and site preliminaries established weeks or months before the first application for payment is certified and settled by the main contractor or employer.
Retention clauses compound the issue: even when valuations are agreed, a percentage — commonly 3–5% — is withheld until practical completion or beyond. A busy firm with multiple live contracts can find a large portion of its earned revenue locked inside uncertified applications and retention accounts simultaneously.
Invoice finance and contract-based facilities
Invoice discounting and factoring allow a company to release cash against certified applications or sales invoices as soon as they are raised, rather than waiting for the debtor to pay. For construction businesses with one or two large employer debtors, selective invoice finance — drawing against specific invoices rather than a whole ledger — can be more appropriate than a whole-turnover facility.
Some lenders offer contract finance specifically for construction, advancing against the value of an entire contract in tranches as work progresses. Eligibility depends on the creditworthiness of the employer, the contract terms and the company's own trading history.
Material procurement and trade credit
Builders' merchants and specialist suppliers frequently extend trade credit to established limited companies, providing 30–60 day terms on account. Where trade credit lines are insufficient for a large project, a short-term business loan or revolving credit facility can bridge the gap between placing a materials order and receiving payment from the employer.
Directors should assess whether the cost of finance is recoverable within their contract pricing. Many construction businesses factor anticipated finance costs into their preliminaries at tender stage.
Subcontractor payment obligations
The Construction Act and standard subcontract terms impose payment notice and pay-less notice obligations. A main or managing contractor must pay subcontractors on time even if the employer above has not yet settled. This upstream-downstream mismatch is a primary driver of finance demand in the sector.
A revolving credit facility or overdraft arranged at company level can smooth these obligations, allowing the business to honour subcontractor payment dates without depending on simultaneous receipt from the employer.
What lenders typically look at
Commercial lenders will want to see the company's filed accounts, a pipeline of contracted work, the identity and credit standing of the main employer debtors and the directors' trading experience. Retention balances and contra-charge exposure are scrutinised because they affect the real collectability of the debtor book.
This is illustrative of the kinds of factors lenders consider and is not a quote or offer of finance. Every application is assessed on its own merits.
Frequently asked questions
Can a construction company borrow against uncertified work in progress?
Most mainstream invoice finance facilities require a certified application or raised invoice. Some specialist contract finance products will advance against work in progress, but terms vary significantly and lenders will assess the contractual basis carefully.
Does retention affect borrowing capacity?
Retention withheld by employers reduces the net value of your debtor book, which can lower the advance available under an invoice finance facility. Some facilities specifically exclude retention from eligible debt.
Funding for UK limited companies
Credicorp lends to your company, not to you personally — short-term working capital with no personal guarantee. See what your business could access.