Construction businesses often fund a large share of a project before they are paid for it. Labour, materials and plant hire are paid for as the job progresses, while income arrives in stages that depend on valuations, approvals and contract terms.
That payment structure also affects which types of finance are available. This guide explains the main cash-flow features of construction work and how they shape the funding options for contracting and subcontracting companies.
Why construction cash flow is different
- Upfront labour and materials. Wages, subcontractor payments and materials are usually paid before the related work is valued and paid for.
- Applications for payment. On many projects, the contractor or subcontractor submits an application for payment for work completed in the period. The amount paid may differ from the amount applied for once the work has been assessed.
- Retentions. Some contracts allow the paying party to hold back part of each payment until a later stage, such as practical completion or the end of a defects period. Retained money can stay outstanding for a long time.
- The Construction Industry Scheme. Under CIS, contractors make deductions from payments to subcontractors and pass them to HMRC as advance payments towards the subcontractor's tax and National Insurance. Depending on the subcontractor's registration status, this can reduce the cash received from each payment.
- Plant and equipment. Excavators, access equipment, tools and vehicles need to be bought, hired or replaced.
How CIS, retentions and payment terms apply to your business depends on your contracts and circumstances. Speak to your accountant about CIS and tax, and take appropriate advice on contract terms.
How payment structure affects invoice-based finance
Invoice finance advances funds against unpaid invoices. In construction, the amount actually due on an invoice or application for payment can be less certain than in many other sectors. It may change after valuation, be reduced by retentions or be subject to disputes or counterclaims.
Because of this, some invoice finance providers are cautious about construction, while others specialise in it. Providers typically consider:
- whether you invoice on agreed amounts or on applications for payment
- how work is valued and approved before payment
- whether retentions apply and how they are treated
- the history of disputes or adjustments on past payments
- who your customers are and how reliably they pay
A business invoicing agreed amounts for completed work may find more options than one billing mainly through staged applications. Availability varies by provider. Our guide to invoice factoring vs invoice discounting explains the main structures.
Want to know which options may suit your business?
Matching finance to construction needs
Plant, machinery and vehicles. Asset finance can spread the cost of equipment and vehicles over an agreement. Asset refinance may release cash from equipment the business already owns.
Labour and materials ahead of payment. Working capital finance can help cover wages, subcontractors and materials while waiting for applications for payment to be settled.
Customer payment gaps. Where invoices are for agreed amounts, invoice finance may release cash earlier than the payment terms allow.
Larger projects and growth. A business loan can fund investment such as mobilising a new contract, opening a depot or expanding the workforce.
Retentions are generally harder to fund than standard invoices, so build retained sums into your cash-flow plan rather than relying on them for short-term cash.
What providers look for in construction
Alongside recent accounts, bank statements and existing borrowing, providers often ask about the order book, typical contract values, main customers and how payments are valued and approved. A clear schedule of work in progress, applications outstanding and retentions held can help.
A commercial finance intermediary such as Emirex Finance can help you prepare this information and explore options for construction businesses.
Key points
- Construction businesses often pay for labour and materials before they are paid for the work.
- Applications for payment, retentions and CIS deductions all affect how much cash arrives and when.
- These features can limit some invoice-based options, though some providers specialise in construction.
- Match the funding to the need: asset finance for plant, working capital for costs, loans for growth.
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This guide is general information, not financial, legal or tax advice. Finance is subject to status, eligibility and approval by the relevant finance provider. Emirex Finance works with UK limited companies only and is not authorised or regulated by the FCA.