Financing a Large Contract You Can't Fund Upfront

The Cash Flow Challenge of Large Contracts

Landing a major construction contract should be cause for celebration—but for many contractors, it creates an immediate cash flow crisis. You need to purchase materials, pay subcontractors, rent equipment, and cover payroll weeks or months before you receive payment from the project owner.

This gap between project expenses and customer payments is one of the most common reasons successful construction companies struggle financially. A $500,000 contract might require $200,000 in upfront costs before you see your first progress payment.

The good news is that several financing options exist specifically to help contractors bridge this gap and take on larger, more profitable projects.

Understanding Your Funding Gap

Before seeking financing, calculate exactly how much working capital you need and when you need it. Consider materials costs (typically 40-50% of project value), labor costs through first payment, equipment rental or purchases, permit and insurance costs, and your overhead during the project timeline.

• Materials: Usually needed 2-4 weeks before work begins
• Labor: Payroll runs whether or not you've been paid
• Equipment: Rental deposits or purchase financing
• Subcontractors: Many require deposits or milestone payments
• Overhead: Your fixed costs continue regardless of payment timing

Contract Financing: Borrowing Against Your Agreement

Contract financing, sometimes called project financing, uses your signed contract as collateral. Lenders advance funds based on the contract value, with repayment tied to progress payments from your customer.

This type of financing typically covers 70-80% of contract value, with terms that align with your project timeline. Interest rates range from 12-24% depending on contract type, customer creditworthiness, and your business history.

Invoice Factoring for Progress Payments

Once you've completed work and invoiced for progress payments, invoice factoring lets you access 80-90% of that invoice value immediately rather than waiting 30-60 days for payment.

Construction factoring companies understand the industry's unique challenges, including retention holdbacks and lien waivers. They advance funds within 24-48 hours, then collect from your customer when the invoice comes due.

Factor rates typically range from 1-3% per month, making this an expensive but fast option for bridging payment gaps.

Business Lines of Credit

A revolving line of credit gives you flexible access to funds as needed throughout a project. You only pay interest on what you borrow, and you can draw and repay repeatedly.

Lines of credit work best when you have established banking relationships. Limits typically range from $50,000 to $500,000 for small contractors, with interest rates of 8-20% depending on your credit profile.

• Draw funds as expenses arise throughout the project
• Repay as progress payments arrive
• Re-borrow for the next phase or project
• Only pay interest on outstanding balance

SBA Loans for Working Capital

SBA 7(a) loans can provide longer-term working capital for contractors with strong financials. While the application process takes 30-90 days, rates are typically 10-13% with terms up to 10 years for working capital.

This option works best for contractors who need ongoing working capital capacity rather than project-specific financing. The longer terms result in lower monthly payments, improving overall cash flow.

Supplier Credit and Payment Terms

Don't overlook the value of negotiating better payment terms with your suppliers. Many material suppliers offer 30-60 day terms for established contractors, effectively providing interest-free financing for a portion of your project costs.

Building strong supplier relationships can significantly reduce your external financing needs. Some suppliers even offer early-pay discounts, which can be worth pursuing if you have available cash.

Choosing the Right Option

The best financing choice depends on your specific situation. Consider how quickly you need funds, the total cost of financing, your relationship with the project owner, and whether you need one-time or ongoing capital.

Preparing Your Application

Regardless of which financing option you choose, lenders will want to see a copy of the signed contract, project timeline and payment schedule, your business financial statements, bank statements (typically 3-6 months), information about the project owner, and your contractor license and insurance certificates.

Having these documents organized and ready speeds up the approval process significantly.

The Bottom Line

Large contracts can transform your construction business, but only if you can fund the work required to complete them. By understanding your financing options and maintaining strong financial records, you can confidently bid on larger projects knowing you have the capital to deliver.

The cost of financing is typically far less than the profit margin on a well-executed project. Don't let cash flow constraints prevent your company from growing.