A general contractor in Ohio closed out last year with $2.4 million in revenue and a 14% net margin on paper. In February, he couldn't make payroll. Not because he failed — because he won. Three large jobs started simultaneously, each requiring upfront material purchases before the first draw check ever arrived. This is the defining cash-flow paradox of the construction industry, and it trips up experienced contractors far more often than bad bids do. According to the Federal Reserve's 2024 Small Business Credit Survey, construction firms report cash flow stress at nearly twice the rate of the average small business. Profit doesn't pay your concrete supplier on Thursday. Cash does.
Why Construction Cash Flow Breaks Even When the Job Is Profitable
The short answer: construction is paid in arrears. You buy materials, pay labor, and carry overhead for weeks or months before a draw check clears. The bigger and more profitable the contract, the bigger the cash hole in between. Margin on paper is irrelevant if your bank account hits zero on day 45 of a 180-day project.
Most commercial contracts are structured around progress billing — you complete a defined phase, submit a Schedule of Values application, wait 30 days for the GC or owner to approve it, then wait another 10-15 days for the check to actually arrive. That is a 45-day float minimum on work you already performed and materials you already purchased. On a $500,000 subcontract, that float can represent $80,000 to $120,000 in unreimbursed costs sitting in your working capital account — or not sitting there, which is the problem. [Fed]
The Retainage Trap
Retainage is the single most underdiscussed cash killer in construction. Standard commercial contracts hold back 5% to 10% of every draw until substantial completion. On a $1.2 million project with 10% retainage, that is $120,000 you may not see for 12 to 18 months after you start work. Multiply that across three active jobs and you have $300,000 or more in earned revenue that legally belongs to you but functionally does not exist yet.
Per a 2023 survey by the Construction Financial Management Association, the average subcontractor carries retainage equal to 6.2% of annual revenue at any given time. For a $3 million sub, that is roughly $186,000 in frozen working capital. Most banks will not lend against retainage because the receivable is conditional. That gap is exactly where alternative financing steps in. [CFMA]
Material Runups: The Cost Nobody Budgeted For
Even a perfectly structured draw schedule can collapse when material costs spike between bid and purchase. Construction input prices are volatile in ways most other industries do not face. A contractor who bids a job in October at lumber prices and breaks ground in February is living with a completely different cost structure — and the contract price does not change.
The Bureau of Labor Statistics Producer Price Index for construction inputs rose 4.1% year-over-year as of early 2025. That might sound modest, but on a $600,000 materials budget, a 4% runup is $24,000 in unplanned cash out the door before a single draw check arrives. Steel, copper wire, and concrete have all seen spot price swings of 15% or more within a single project cycle in recent years. [BLS]
Here is the part that rarely shows up in contractor finance guides: suppliers increasingly offer early-pay discounts of 2% net-10 terms. On a $200,000 material order, a 2% discount is $4,000. Contractors who have the cash to take those terms — or a short-term credit line that lets them act like they do — effectively reduce their material cost by a meaningful margin. Contractors who are cash-strapped pay full 30-day or 45-day net pricing instead. The cash-poor contractor is literally paying more for the same materials than the cash-rich one. That spread compounds across every job, every year.
What Funding Options Actually Work for Contractors
The right tool depends on what is causing the gap — slow receivables, a specific material purchase, equipment, or a retainage backlog. No single product fixes every construction cash flow problem. Here is what is actually available and when each one makes sense.
| Product | Best For | Typical Term | Speed to Fund | Watch Out For |
|---|---|---|---|---|
| SBA 7(a) Line of Credit | Ongoing working capital, seasonal gaps | 12-month revolving | 30-90 days | Long underwrite; collateral required |
| Construction Business Term Loan (bank) | Equipment, bonding capacity | 3-7 years | 3-6 weeks | Requires 2 years of strong financials |
| Invoice / Receivables Financing | Slow-pay GC or owner invoices | Until invoice paid | 1-3 days | Fees stack if invoices age past 60 days |
| Merchant Cash Advance (MCA) | Emergency material purchase, payroll gap | 3-18 months | 24-48 hours | Factor rates are expensive; use short-term only |
| Equipment Financing | Buying vs. renting heavy equipment | 24-72 months | 3-7 days | Collateral is the equipment; easier to qualify |
| Retainage Financing | Unlocking held-back receivables | Until retainage released | 3-5 days | Niche product; not all lenders offer it |
A few things worth saying plainly: an SBA 7(a) loan at prime-plus-2.75% (roughly 10-11% APR as of mid-2025 per SBA rate schedules) is dramatically cheaper than an MCA with a 1.35 factor rate. But the SBA takes 60-plus days to close. If your concrete pour is in two weeks and your supplier wants a check, the SBA is not going to help you. [SBA]
The most expensive funding is always the one you scramble for at the last minute. Contractors who establish a credit line before they need it — ideally during a strong revenue quarter — pay far less over a year than those who grab an MCA under pressure. Set up the line. Use it strategically.
Invoice Financing vs. MCA: The Real Math for a Contractor
For most established contractors with documented receivables, invoice financing is almost always cheaper than a merchant cash advance. The math on this is not close. Invoice financing fees typically run 1% to 3% of the invoice face value for a 30-day advance. An MCA at a 1.35 factor on a $100,000 advance means you repay $135,000 — that is 35% total cost, which annualizes to well over 60% APR depending on repayment speed.
Concrete example: a roofing contractor with a $180,000 invoice from a commercial GC, payment due net-45. Invoice financing at 2% per 30 days costs roughly $3,600 to bridge that 45-day gap. An MCA of the same size at a 1.30 factor costs $54,000 to borrow $180,000. The MCA makes no sense here — unless the contractor has no documented receivables, poor credit, or needs cash for something other than a specific invoice, in which case invoice financing is not available anyway.
One nuance most broker guides skip: some GCs will not allow invoice factoring or assignment of receivables without consent per the contract terms. Before you factor an invoice, read the anti-assignment clause. We have seen deals fall apart because a subcontractor did not check this first.
What Lenders Actually Look At When Funding a Contractor
Construction underwriting is different from a retail or restaurant underwrite. Bank deposits matter, but lenders also want to see your contract backlog, your Schedule of Values history, and — critically — who you are working for. A $2M subcontract from a publicly traded GC gets underwritten very differently than a $2M contract from a single-location LLC with no track record.
- 3 months of business bank statements showing deposit consistency, not just volume
- Current contracts or signed LOIs showing forward revenue (backlog is a major positive signal)
- Accounts receivable aging — lenders want to see how many invoices are 60-plus days outstanding
- Bonding capacity and current bond line (signals creditworthiness without a word being said)
- Personal credit score of the owner — most construction lenders still require 620 minimum even for business-only products
- Documentation of any retainage held — some lenders will advance against it at 50-60 cents on the dollar
Per FDIC call report data from 2024, commercial real estate and construction lending tightened at mid-sized regional banks through late 2024, with net tightening reported by 18% of surveyed institutions. That means your regional bank relationship is under more scrutiny than it was two years ago — not less. [FDIC]
When a Contractor Should NOT Take On More Debt
More funding is not always the answer. Sometimes the cash flow problem is structural — overbidding jobs at low margin to win volume, not enforcing change order billing, or letting receivables age past 90 days without collections action. Borrowing to cover those problems just delays the reckoning and adds interest cost.
If your average collection period on receivables is longer than 60 days, fix the billing process before you add debt. If you have more than 15% of revenue tied up in unapproved change orders, that is a collections problem, not a funding problem. And if your net margin is under 5% on most jobs, new capital will not fix a pricing problem.
- Do not borrow to fund jobs you cannot staff — labor shortages sink cash-financed projects faster than undercapitalized ones
- Do not factor invoices from GCs who have a history of disputing pay apps — you may still owe the factor even if the GC withholds payment
- Do not take an MCA to cover overhead if revenue is declining year-over-year — that is a spiral, not a bridge
- Do not skip the math: model your actual draw schedule before you pick a loan product
FynFund works with 100+ MCA and lending sources. From that vantage, the contractors who get the best terms are not always the ones with the best credit — they are the ones who come in with organized financials, a clear picture of their backlog, and a specific ask. Vague requests get expensive offers.
