Invoice Finance for Construction — Subcontractors & Builders

Construction businesses — particularly subcontractors — face some of the worst cash flow problems in any UK sector. You pay labour weekly, materials on delivery, and plant hire monthly. But main contractors often don\'t pay for 60, 90, or even 120 days. Add retentions (typically 5-10% held back for 6-12 months) and it\'s easy to run out of cash even when you\'re profitable on paper.

Invoice finance can solve this by releasing 70-80% of your invoice value within 24 hours of submitting it. You don\'t wait for the main contractor to pay — you get cash immediately to cover wages, suppliers, and the next job.

Why construction needs invoice finance

The construction cash flow problem:

• Weekly labour costs — pay subcontractors (subbies) and direct labour every Friday
• Immediate material costs — merchants expect payment in 7-30 days
• Monthly plant/equipment hire — diggers, scaffolding, skips paid monthly
• But payment terms are 60-90 days — main contractors pay slowly, sometimes 120+ days
• Retentions held back — 5-20% of each invoice kept for 6-24 months until final account or defects period ends

This creates a cash flow gap of £50,000-£200,000+ for a busy subcontractor turning over £500k-£1m annually. You\'re constantly chasing payment while needing to fund the next job.

How invoice finance works for construction

Here\'s the typical process for a construction subcontractor using invoice factoring:

1. You complete work and invoice the main contractor — e.g., £50,000 for groundworks, with 10% retention (£5,000)
2. You submit the invoice to your factoring provider — usually via their online portal or app
3. The provider advances 75% of the non-retention value — in this case, 75% of £45,000 = £33,750 paid within 24 hours
4. The main contractor pays the factoring provider — in 60-90 days, they pay the £45,000 non-retention amount
5. You receive the balance — the remaining £11,250 (£45,000 - £33,750 advanced), minus the provider\'s fees (typically £800-£1,200 for this invoice)
6. Retention is financed separately when released — when the contractor releases the £5,000 retention (6-12 months later), the provider can advance 75% of that too if needed

Dealing with retentions

Retentions are standard in construction (typically 5-10%, sometimes up to 20%) and create a major cash flow problem. The good news: most invoice finance providers understand retentions and can work with them.

How retentions are handled:

• The retention portion cannot be advanced initially (it\'s not due to be paid yet)
• The non-retention portion (80-95% of the invoice) can be advanced at the standard rate (70-80%)
• When the contractor releases the retention months later, you can submit it for finance at that point
• Some providers offer retention finance as a separate product, advancing against future retention releases for an additional fee

Important: If your retentions are very high (over 25% of invoice value), some providers won\'t finance the work because too little is available to advance upfront.

Advance rates and costs for construction

Construction gets lower advance rates and higher costs than sectors like recruitment or professional services. This reflects the higher risk: payment disputes, insolvencies, retentions, and complex supply chains.

Typical advance rates:

• 70-80% of the non-retention invoice value (after retentions deducted)
• Higher rates (up to 85%) if you invoice tier-1 contractors or public sector clients
• Lower rates (60-70%) for riskier work: small domestic builders, new build developers, commercial fit-out

Typical costs (% of annual turnover):

• Service fee: 2.0-3.0% of turnover (covers administration and collections management)
• Discount charge: 8.0-9.5% annual rate on funds advanced (currently 3.5-5% over 4.5% Bank of England base rate)
• Total cost: 3.0-4.5% of turnover for a typical whole-turnover factoring facility

For a £600,000 turnover subcontractor, this means £18,000-£27,000 per year in fees. Whether that\'s worthwhile depends on the alternative: emergency overdrafts, director\'s loans, missed supplier discounts, or turning down work because you can\'t fund it.

Worked example: Groundworks subcontractor

A groundworks contractor turns over £800,000 annually, invoicing main contractors with typical 60-day payment terms plus 10% retention. Cash flow is tight because they pay plant hire weekly and materials on 30-day terms.

For this business, the £26,750 cost might be justified if it means they can:

• Take on 2-3 more jobs per year (additional £150k+ revenue)
• Negotiate better supplier terms by paying upfront (2-5% discounts)
• Avoid expensive emergency borrowing or maxed-out director\'s loans
• Sleep better at night knowing wages are covered

Invoice Finance vs Overdraft for Construction

Many construction businesses compare invoice finance to extending their overdraft. Here\'s how they differ for a typical £600k turnover subcontractor:

Reality check: Most construction subcontractors outgrow their overdraft within 12-18 months. Invoice finance gives you 3-4x more cash and scales automatically — but costs more. If you\'re turning over £600k+ and constantly hitting your overdraft limit, invoice finance is worth exploring.

Who qualifies for construction invoice finance?

You\'re likely to qualify if:

• Turnover: £100,000+ annually (some providers require £250k+)
• Customers: You invoice established main contractors, house builders, or public sector bodies (not domestic homeowners)
• Trading history: At least 12 months in business (some require 2 years)
• Payment terms: 30-90 day credit terms (not cash-on-completion domestic work)
• Clean record: No CCJs, no insolvency history, not in administration

What disqualifies you:

• Invoicing domestic customers (homeowners) — invoice finance is B2B only
• Very high dispute rates or customers with poor payment history
• Retentions over 30% of invoice value (too little available to advance)
• Main contractor contracts that prohibit invoice assignment (check your terms — some contractors don\'t allow factoring)

Pros and cons of invoice finance for construction

Advantages

• Immediate cash release — 70-80% of invoice value within 24 hours instead of waiting 60-90+ days
• Scales with growth — the more you invoice, the more cash you can access (unlike a fixed overdraft)
• Covers the payment gap — pay labour Friday, get cash Monday
• Outsourced credit control — provider chases late-paying contractors (with factoring)
• No fixed debt — you\'re not borrowing money; you\'re accessing cash you\'ve already earned

Disadvantages

• Higher cost than other sectors — 3-4.5% of turnover vs 1.5-2.5% for recruitment
• Lower advance rates — 70-80% in construction vs 85-90% in recruitment/IT
• Retentions can\'t be financed initially — only the non-retention portion is available for advance
• Recourse risk — if the main contractor disputes the invoice or doesn\'t pay, you have to repay the advance
• Main contractor may object — some contracts prohibit assignment; some contractors view factoring negatively
• Long contracts — most providers require 12-24 month commitment with early exit penalties

Frequently asked questions