Construction Financing: Progress Billing & Equipment
Construction cash flow has three timing problems (billings, retainage, and equipment) and one funding stack that solves all three.
Construction is where the layered-capital approach earns its keep. The cash flow has structural timing gaps in three places: progress billings (you bill against work completed, but payment lags by 30–60 days), retainage (5%–10% of contract value held back until completion, sometimes for months after substantial completion), and equipment carrying costs (the gear has to be on the job before the first dollar invoices). No single product solves all three. The right answer is usually a combination. The primary tool for general contractors and subs with progress billings against commercial or government owners is AR-based financing: either standard factoring on the commercial side or government contract financing for federal, state, and local work. Advance rates land at 80%–90% on eligible billings, with retainage carved out of the borrowing base until release. Specialty trades (electrical, mechanical, framing, roofing, foundation) often start in factoring and graduate to ABL once revenue passes $5MM and financials clean up. Equipment financing is the second pillar. Construction is equipment-heavy by definition, and the right answer for capacity expansion is rarely a working-capital draw. It's a 60–84 month equipment loan or lease against the specific asset, often at single-digit to low-double-digit rates. Sale-leaseback is the move when you need to pull cash from gear you already own (free-and-clear loaders, trucks, tooling) without taking on a new bank covenant. Bridge capital is the third pillar: short, interest-only money to cover bid-to-award timing gaps, mobilization, payroll bumps on a new contract, or to clean up a maxed bank line ahead of bonding renewals. Closes in days, typically exits in 6–12 months with aggressive early-payoff discounts. For contractors trapped in MCAs (a depressingly common situation when a slow quarter hits), debt refinancing is the path back to standard products.
The cash-flow challenges construction & contracting actually face
- •Progress billings paid net-30 to net-60 from owners or GCs, often longer once disputes and change orders enter the picture
- •Retainage of 5%–10% held back until substantial completion ties up significant working capital for months after the work is done
- •Equipment-heavy operations require capital that ties to asset life (loaders, trucks, tooling), not to month-to-month working capital
- •Bid-to-award timing gaps require upfront cash for mobilization, payroll, and materials before the first billing posts
- •Bonding renewals create periodic credit pressure that can squeeze the working capital line at the worst moment
- •Tax returns showing low net income (because of depreciation and aggressive cost accounting) underrepresent the actual cash position to banks
- •MCAs taken on during a slow quarter can compound quickly into a daily-debit problem that competes with payroll for cash
What usually fits, ranked
Invoice Financing
Standard commercial factoring on progress billings and completed-work invoices. 85%–90% advance on eligible AR, retainage carved out until release. Fits subs and general contractors with commercial or private-owner customers.
Government Contracts
For contractors with federal, state, or local government awards. Advances up to 90% of contract value; underwrites the contract itself, which is what makes subcontractor deals viable here.
Equipment Leasing & Financing
60–84 month terms on loaders, trucks, tooling, fleet. Sale-leaseback extracts cash from free-and-clear equipment without adding a bank covenant. Rates from single digits to low double digits depending on asset and credit.
Bridge Funding
Short, interest-only money for bid-to-award timing, mobilization, or bonding renewals. Closes in days, exits in 6–12 months with aggressive early-payoff discounts.
Asset-Based Lending
At $5MM+ revenue with clean financials, an ABL line combining AR, equipment, and sometimes inventory replaces multiple smaller facilities at Prime + 1–4%.
Consolidation & Recapitalization
For contractors stacked with MCAs after a slow quarter. The path out is usually a longer-term asset-based product that pays off the daily-debit advances at closing and reduces monthly debt service 30%–50%.
Real Estate Lending
If the contractor owns the yard, shop, or office, a cash-out refinance is almost always the cheapest capital, Prime + 2–7%, and frees working capital for the business.
How this plays out in practice
A site work contractor doing about $22MM in revenue is carrying $3.4MM in receivables, of which roughly $1.1MM is retainage across seven jobs. It owns an equipment fleet (excavators, dozers, haul trucks) with no liens on most units. The bank line is $1.5MM and fully drawn every spring during mobilization season. The receivables-only path is disappointing on inspection. Excluding retainage and the billings still awaiting owner approval leaves about $1.4MM of approved progress billings eligible, supporting roughly $1.05MM at a 75% advance rate. That is less than the existing bank line and it took three weeks to establish. The equipment changes the picture. An appraisal supports $4.1MM of orderly liquidation value across the free-and-clear units, producing a $3.1MM term facility at 76%. Combined with a $1.05MM revolver against approved billings from a construction-specialist lender, total availability reaches roughly $4.15MM at a blended cost near Prime plus 4%. When the company wins a $6MM municipal award the following quarter, contract financing against the assigned contract covers mobilization without touching either facility. The fleet was the answer the whole time, and it had been sitting in the yard.
Public case study: Refi Of Termed Bank Line, $300K
This specialty contractor, focusing on steel framing, was introduced to Serve Funding by a banker they approached for credit.
See full case study →How Michael thinks about construction & contracting
“There are a number of avenues to explore, but I definitely don't want to make any promises. I'd rather under promise and over deliver and not the other way around.”
— Michael Kodinsky, Founder of Serve Funding · Mike on managing expectations through construction deal structuring, where retainage, change orders, and bonding requirements often add complications that come into focus only mid-diligence.
“If you had real estate, with either free-and-clear or with a first mortgage where there's some equity behind it, if your biggest driver, for instance, was cost of capital, I'd start with let's talk about any real estate assets you have, because real estate is always going to command the lowest rates.”
— Michael Kodinsky, Founder of Serve Funding · Mike on the layered-capital framework, relevant for contractors who own their yard, shop, or office and want to pull the cheapest dollars first.
“The problem with MCAs is, the most logical way to describe it is, it's like a drug, that people get addicted to. They sell it real cleverly.”
— Michael Kodinsky, Founder of Serve Funding · Mike on the MCA spiral. Painfully common in construction during slow quarters, and the reason debt refinance shows up so often in the recommended stack.
Advance rates and eligibility in construction & contracting
| Facility size | $250K - $25MM |
|---|---|
| Pricing (2026) | Prime + 2%-6% |
| Equipment advance | 70%-80% of appraised liquidation value on owned, free-and-clear machinery |
| Approved progress billings | 70%-80% advance, with documented sign-off required |
| Retainage | Excluded from the borrowing base |
| Time to close | 15-30 business days including appraisal and contract review |
| Contract-specific option | Contract financing against a single assigned contract, strongest on public work |
| Deal-stoppers | Active mechanics lien or bond claims, no WIP schedule, unresolved surety issues |
| What lenders read first | The contract: pay-when-paid, offset rights, assignment restrictions, surety agreement |
| Serve fee | A success fee, earned only on closing. Agreed in writing before you sign anything. No retainers, no upfront costs |
What doesn't usually fit (and why)
Half of being useful is being honest about what doesn't work. These are products we generally don't recommend for construction & contracting, and the reason.
Construction work isn't structured around finished-goods POs the way manufacturing is. The cost being carried is labor, equipment time, and consumable materials performed on the project, which AR-based financing handles directly.
Most contractors don't carry inventory at cost in a way an inventory lender can underwrite. Materials are typically consumed on the job, not held on a shelf.
