Contractor financing: pay the crew now, get paid later

On this page

• Why contractors need money before the customer pays
• A worked example: one job, paid 60 days after billing
• What SBA offers contractors
• Trucks, tools and heavy equipment
• When contractor financing is a bad idea
• What a contractor lender will ask for
• Questions to ask before you sign

Why contractors need money before the customer pays

Fund job costs with a line of creditline of creditA credit limit you can draw on, repay and draw on again. and equipment with a term loan. Job costs come back when the customer pays, and equipment lasts for years.

Contractors pay labor and materials weekly and get paid after a billing cycle. Retainage, money the customer holds back until the job is done, can stretch the wait.

Match each tool to the need.

• Line of credit. Covers job costs that come back when the customer pays.
• Contract line. SBA's Contract CAPLine finances the costs of specific contracts.
• Invoice factoring. Sells billed invoices to a factor for cash now and a fee.
• Equipment loan. Finances trucks and tools over their working life.

Expect the lender to ask for a guarantee or collateralcollateralProperty a lender can take and sell if a loan is not repaid. . In the Federal Reserve Banks' 2026 survey, 59% of firms with debt used a personal guaranteepersonal guaranteeYour promise to repay the loan yourself if the business cannot. to secure it and 51% used business assets.

A worked example: one job, paid 60 days after billing

Suppose you win a $120,000 job with $90,000 of direct costs, so gross profit is $30,000. You pay the costs over two months, and the customer pays 60 days after billing. To keep the arithmetic simple, assume you carry the full $90,000 for 3 months. Assume 12% a year on borrowed money. This is an illustration, not a quote.

A line of credit.

• Interest: $90,000 × 12% × 3/12 = $2,700.
• That is 9% of the job's gross profit ($2,700 ÷ $30,000).

A cash advance with a factor rate of 1.3.

• You repay $90,000 × 1.3 = $117,000, so the cost is $27,000.
• That is 90% of the gross profit. You keep $3,000 for the job.

Invoice factoring. Suppose you bill $60,000 first, and a factor charges 2% of the invoice for each 30 days it stays unpaid. Factors set their own fees.

• If the customer pays in 60 days, the fee is $60,000 × 2% × 2 = $2,400.
• A slower customer raises the fee, so ask how the factor counts days.

Divide each financing cost by the job's gross profit before you accept it. If the share is large, raise the price or finance the job another way.

Retainage stretches the wait. Suppose the customer holds back 10%, or $12,000, for 90 days after you finish. Carrying $12,000 for 90 days at the assumed 12% costs $12,000 × 12% × 90/365 = about $355. Ask whether retainage counts toward the limit you can borrow.

What SBA offers contractors

A Contract CAPLine finances the direct labor, materials and allocable overhead costs of specific contracts (SOP 50 10 8.1, Sec. B, Ch. 4, Para. A.2). You must show that you operate profitably based on similar contracts you have completed. You must also show you can bid, project costs and do the work (Para. A.2.a).

The limits matter.

• It cannot pay for mark-up or profit, permanent working capital, fixed assets or existing debt (Para. A.2.b).
• It cannot finance a contract in which significant performance has already begun. Arrange the line before you start work.
• The lender usually takes an assignment of contract proceeds, so the customer pays the lender (Para. F.2).
• Money advanced for one contract cannot be used on another (Para. A.2.c and d).

The maximum is $5,000,000 (Sec. B, Ch. 4, Para. B.1) with a term up to 10 years (App. 17, Para. B.5). A CAPLine of $50,000 or less needs no collateral (App. 19, Para. B.5). Each owner of 20% or more gives an unlimited personal guaranty (Sec. A, Ch. 5, Para. A.1).

A Builders CAPLine is different. It finances small general contractors who build or rehabilitate property for resale, not a customer's job (Para. A.4).

SBA's Surety Bond Guarantee program guarantees bid, performance and payment bonds issued by certain surety companies. That lets small businesses that may not meet other sureties' criteria offer bonds. Contract limits and fees are on SBA's page, so check them before you bid.

Trucks, tools and heavy equipment

Finance equipment with a term loan sized to its working life. An SBA 7(a) loan can run 10 years, or up to 15 years if the IRS asset class useful life supports it (App. 17, Para. A.2).

A 504 loan excludes automobiles and trucks. It allows construction equipment only if the equipment is heavy duty and integral to the business. It must also have at least 10 years of remaining useful life (13 CFR 120.884(e)).

A short loan on a long asset strains cash flow. SBA's own refinancing rule gives a 3-year loan on a 15-year machine as its example of an inappropriate maturity (App. 14, Para. A.1.f). Choose the shortest term whose payment your slowest months can carry.

When contractor financing is a bad idea

• A cash advance on a thin-margin job. The example above leaves $3,000 of profit on a $30,000 job.
• Drawing before the paperwork is signed. Do not finance a change order or add-on the customer has not approved in writing.
• A line that covers a losing job. A draw delays the loss and adds interest.
• Factoring a disputed invoice. The OCC notes that factors check whether the client can handle charge backs and disputed accounts (p. 34).
• Stacking advances. Taking a second advance to cover the first adds a new debit to a cash flow that could not carry the first.

What a contractor lender will ask for

Bring the job records along with the tax returns. A lender wants to see that you price jobs and finish them at a profit.

• Financial history. On a CAPLine, the lender analyzes the three most recent years of tax returns or financial statements plus an interim statement (Sec. B, Ch. 4, Para. C.2.a).
• Job cost records. A Contract CAPLine needs a project cost schedule showing direct material, labor and overhead for each contract, with profit left out (App. 20, Para. B.5).
• The contract itself. The lender also needs a copy of each contract the line will finance (App. 20, Para. B.5).
• Payment history. A Builders CAPLine applicant must show prior prompt payments to suppliers and subcontractors (Sec. B, Ch. 4, Para. A.4.a).
• Other records. Ask what else the lender wants, such as a work-in-progress list, backlog and a receivables aging. Requirements vary by lender.

Questions to ask before you sign

• Does the lender take an assignment of contract proceeds, and who tells the customer?
• Are retainage and disputed invoices excluded from what you can borrow or sell?
• If you factor, is the sale with recourse? With recourse, you owe the factor when your customer does not pay.
• Which fees apply beyond the rate, and which are taken out of the amount you receive?
• What do you pledge, and who signs a personal guarantee?

None of the sources cited here gives typical factoring fees. Get every fee in writing and run the arithmetic above with your own numbers.