Business funding for construction firms

A construction firm borrows to cover the gap between doing the work and being paid for it, because retentions, CIS deductions and the VAT reverse charge each take cash out of every payment. Lenders fund that gap with invoice finance, plant finance and term loans, and judge it on your contracts, your payment record and your order book.

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How retentions and applications for payment hold back cash

A building contract pays in stages. Under section 109 of the Housing Grants, Construction and Regeneration Act 1996, work expected to last 45 days or more carries the right to interim or stage payments. You submit an application, the payer issues a payment notice or a pay less notice, and the money is due by the final date for payment in the contract.

Each payment then has a slice held back. A retention is a percentage of each valuation kept as security against defects, released on dates the contract sets, for example half at practical completion and half at the end of the defects period. Across a run of jobs the retentions owed to you add up to earned money that sits in your accounts as a debt and cannot pay a wage bill.

Materials, plant hire and labour go out during the month, the application goes in at the end of it, and the money arrives at the end of the payment period. A pay-when-paid clause cannot make you wait for your customer’s customer: section 113 of the 1996 Act makes it ineffective unless the payer further up the chain is insolvent. If you are not paid by the final date, section 112 lets you suspend work after at least seven days’ notice.

A month on a subcontract package

Illustrative example

A groundworks subcontractor, registered for VAT and for CIS with net payment status, applies for £60,000 of work done this month. The subcontract holds a 5% retention (an assumed figure: your contract sets it), and £35,000 of the valuation is labour, with the rest materials.

Gross valuation for the month
£60,000
Less retention at the assumed 5%
−£3,000
Net amount due
£57,000
Less CIS deduction at 20% of the £35,000 labour element
−£7,000
VAT on the invoice under the reverse charge
£0
Cash received for £60,000 of work
£50,000

Without the reverse charge the invoice would have carried £11,400 of VAT to hold until the VAT return. A limited company sets the £7,000 of CIS against the tax and National Insurance due on its own payroll each month, and carries any surplus forward within the tax year.

CIS deductions and the VAT reverse charge

Under the Construction Industry Scheme a contractor deducts 20% from the labour part of each payment to a registered subcontractor it can verify, and 30% otherwise. VAT and materials are left out. With gross payment status nothing is deducted and you pay your own tax when it falls due.

Since 1 March 2021 the VAT domestic reverse charge has applied to building services between businesses registered for both VAT and CIS. The customer accounts for the VAT, so the subcontractor invoices without it while still paying VAT on materials. HM Revenue and Customs says such a business may make net repayment claims and can apply for monthly VAT returns. The charge stops at an end user, such as a developer that tells its contractor in writing that it does not sell the construction services on.

From 6 April 2026 HM Revenue and Customs can remove gross payment status immediately where a business knew, or should have known, that a payment was connected to fraud, charge it the lost tax plus a penalty of up to 30%, and bar it from reapplying for five years. A lender treats a lost gross payment status as a tax problem, so keep records of who you paid in your supply chain and why.

Gross payment status tests

£30,000turnover over the last 12 months for each director of a company, ignoring VAT and materials
£100,000turnover for the whole company, as the alternative test
20%deduction for a registered subcontractor the contractor can verify
30%deduction for an unregistered or unverified subcontractor

Source: gov.uk, What you must do as a Construction Industry Scheme subcontractor, checked 3 November 2026

Where a company is controlled by five people or fewer, the turnover test is £30,000 for each of them. HM Revenue and Customs also checks that the business is run through a bank account and that its tax has been paid and its returns filed on time, and it reviews the status every year.

The retention ban in the Small Business Protections Bill

Retentions may be banned

The Small Business Protections Bill, introduced on 19 May 2026, would stop payers withholding retentions under construction contracts. It had not become law by November 2026, and the government will consult on when the ban starts. Until then, fund your work on the retention terms in the contracts you sign.

A mechanic working under the bonnet of a car in a garage

What lenders worry about on a building contract

A lender funding a contractor is lending against payments that are not yet certain. An application can be cut by a pay less notice, set off against a delay claim, or lost if the main contractor fails. Invoice funders want a debt the customer has agreed, and an application is a claim until it is certified.

The lender then asks whether your order book is profitable at the prices you tendered, how much turnover depends on one main contractor, whether your valuations get certified close to what you apply for, and how the business came through its last bad debt or disputed final account.

Finance that fits a contractor

Invoice finance on certified work

Funders advance against certified valuations and agreed final accounts. Some fund applications through selective invoice finance or a construction facility and price the dispute risk into it. Invoice finance sets out how the facilities work.

Plant and vehicles

Plant and machinery finance and hire purchase spread the cost of excavators, telehandlers and vans over their working life, with the machine as security. Asset refinance raises cash against kit you already own.

Tax bills

A VAT loan or corporation tax loan spreads a tax bill over monthly payments. HM Revenue and Customs may also agree a time to pay arrangement.

Working capital and sites

A revolving credit facility or term loan covers the gap between paying for a job and being paid. A firm building to sell looks at development finance.

Documents that settle a lender’s questions

The director’s side of a construction loan

A lender to a small contractor may ask the directors for a personal guarantee and the company for a debenture. A guarantee that covers all money owed to the lender can outlast the loan it was given for. Business protection can clear it if a director dies or falls seriously ill. If the company owns its yard, a small self-administered pension scheme can buy it and lease it back.

The funding search through Swoop is for limited companies and LLPs, and for sole traders and partnerships borrowing more than £25,000. A sole trader in the first five years of trading who needs less can apply to the government’s Start Up Loans scheme (£500 to £25,000, unsecured, personal) or ask their own bank.

Working capital calculator

The days between paying for stock and being paid by customers, and the working capital that gap ties up.

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Questions people ask

Can you get invoice finance on applications for payment?

Some funders will, through a construction facility or selective invoice finance, and they price in the risk that the application is cut back or disputed. Certified valuations and agreed final accounts are easier to fund because the customer has accepted the debt. Expect the funder to ask for your record of applications against certified amounts and the contract payment terms.

What is a retention in construction?

A retention is a percentage of each payment that the client or main contractor keeps back as security against defects. The contract sets the rate and when it is released, for example part at practical completion and the rest at the end of the defects period. The Small Business Protections Bill, introduced in May 2026, would ban retentions under construction contracts, but it had not become law by November 2026 and no start date had been set.

How does the CIS deduction affect cash flow?

A contractor deducts 20% of the labour element of each payment if you are registered and verified, or 30% if you are not, and pays it to HM Revenue and Customs. A limited company gets it back by setting the deductions against the tax and National Insurance due on its own payroll each month, with any surplus carried forward within the tax year. Gross payment status removes the deduction altogether.

Will a lender want a personal guarantee from a building company director?

A lender to a smaller contractor may ask for one, alongside a debenture over the company’s assets. The guarantee makes you personally liable for the debt if the company cannot pay. Ask whether it is limited to a set amount and to this loan, and look at cover that would clear it if you died or fell seriously ill.

Finance is subject to status and to the lender’s terms. A personal guarantee makes you liable for the company’s debt if it does not repay, and it can be enforced against your own assets, including your home. Nothing here is a personal recommendation.

Funding by sector

Invoice finance

Borrowing against unpaid invoices, through factoring, discounting or single invoices.

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Selective invoice finance

Funding for single invoices you choose, priced invoice by invoice.

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Plant and machinery finance

Plant and machinery finance pays for excavators, tractors and machine tools, new or used, over their working life.

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VAT loans

A short loan that pays your VAT bill on the due date and spreads the cost over a few months.

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All business funding

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Start a funding search

Funding searches run on Swoop’s platform. Swoop Finance Limited is a credit broker and not a lender, and is authorised and regulated by the Financial Conduct Authority (FRN 936513). Buzz Accounting Ltd introduces businesses to Swoop and may receive a fee from Swoop when funding is arranged. Business funding is separate from the financial advice Equity & General Financial Services Limited gives through this website. Finance is subject to status, and a lender may ask a director for a personal guarantee.

Cover for a personal guarantee

If a lender asks you to guarantee the company’s borrowing, our advisers can advise on life cover for that debt.

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