Financing for Subcontractors: How Credit Lines, Cash Advances, and Loans Actually Work

Consider the scales of justice: when balanced, there’s stability and order; when off-kilter, whatever is on those scales is at risk of crashing to the ground. This is the perpetual scenario for subcontractors—managing the cash flow gap between immediate costs for labor and materials and delayed payments from owners and GCs. This balancing act becomes even more unstable with "pay-when-paid" clauses, retainage, and the industry’s average 96-day payment cycles.

To bridge this gap, subcontractors often turn to financing—not as a safety net, but as an operational tool. Thus, it’s necessary for subcontractors to understand the outside-capital landscape. Because whether you’re mobilizing for a massive commercial project or bridging the gap during a slow collection month, you might just very well need to enlist outside help.

Why Subcontractors Need Outside Capital

The commercial construction model places a heavy burden on trade contractors. You’re often acting as the bank for the project, fronting the costs for mobilization, materials, and payroll weeks or months before the first requisition check arrives. This dynamic can create a need for financing, especially in these three scenarios:

1. Mobilization funding: The start of a project requires a surge of cash for deposits on materials, equipment rentals, and crew deployment.
2. Growth and backlog: A growing project backlog is positive for revenue but dangerous for cash flow. Taking on more work increases the immediate strain on cash reserves.
3. Surviving retainage: With 5–10% of contract value held until project closeout, financing for retainage often becomes necessary to cover overhead while waiting for that final payout.

Note for accountants: Effective subcontractor cash flow management isn't about avoiding debt; it’s about ensuring the cost of capital in construction does not erode project margins.

Key Factors to Evaluate Before Seeking Financing

Now, many subcontractors pride themselves on operating without touching outside capital—they know their “operating sweet spot,” i.e., how many projects to take on at any given time. That said, shit happens. And if it does, it’s best to go into the situation well-informed. 

So, before signing a term sheet, you and/or your accounting teams must analyze the current financial health of the business against the proposed financing structure. 

Evaluate these five factors:

1. Project backlog and velocity: Do you have future revenue secured to service the debt? Is the work starting immediately or months out?
2. Cash-outlay timing: When exactly do your vendors need payment vs. when does your GC pay? Map the days sales outstanding (DSO) against days payable outstanding (DPO).
3. GC payment velocity: If you’re working with a GC known for slow payments (60–90+ days), short-term, high-interest loans can be disastrous.
4. Risk exposure: Does the financing require a personal guarantee or a UCC lien on business assets?
5. Cost of capital: Calculate the true annualized percentage rate (APR). A factor rate on a cash advance might look low (e.g., 1.2x), but if the term is short, the annualized interest rate can be significant.

Pro tip: Savvy construction companies consider financing options in their bid strategy. When estimating a job, calculate the cost of capital in construction and include it in your overhead or margin calculations.

The Landscape of Subcontractor Financing Options

The market has evolved beyond simple bank loans. Today, there are specialized services built specifically for the nuances of construction project funding.

1. Traditional Construction Lines of Credit (LOC)

This is the gold standard for construction working capital.

• Best for: Ongoing operational expenses, payroll, and smoothing out lumpy cash flow.
• Pros: Generally lower interest rates; you only pay interest on what you draw.
• Cons: Harder to qualify for; requires strong financials and often collateral.

2. Construction-Specific Material Financing

These platforms understand pay-when-paid cash flow solutions. Services like Billd, CoFi, or Constrafor often pay your material suppliers directly upfront and allow you to pay them back when you get paid by the GC (typically 120-day terms).

• Best for: Large material purchases where suppliers demand upfront payment.
• Pros: Aligns repayment with GC payment cycles; keeps your bank LOC-free for payroll.
• Cons: Fees can be higher than a bank LOC and specific to project-related costs.

3. Invoice Factoring

Construction invoice factoring involves selling your open receivables to a third party at a discount in exchange for immediate cash. Essentially, you invoice the client. You also submit that invoice to the factoring company (e.g., Bill, Billd). The factoring company provides a cash advance worth a percentage of the invoice value. Your client pays the invoice. The factoring company sends the remainder of the invoice value, minus the factoring fee.

• Best for: Immediate cash needs when you have approved pay apps but cannot wait 45+ days for the check.
• Pros: Fast access to cash; relies on the creditworthiness of the GC, not just the sub.
• Cons: Can be expensive; some GCs may not allow assignment of payments.

4. Cash Flow-Based Advances and Loans

Fintech lenders (like Kapitus or Fundbox) offer term loans or lines of credit based on your banking history and revenue flow rather than strict collateral.

• Best for: Short-term bridges or emergency expenses.
• Pros: Very fast approval and funding speeds.
• Cons: Generally higher interest rates and shorter repayment terms (weekly or daily draws).

The Subcontractor Financing Evaluation Checklist

The four financing options above are a lot to consider—especially with dozens of lenders in each category. This checklist standardizes the review process for new credit facilities, loans, or factoring agreements, ensuring alignment with project margins and operational capabilities.

1. Strategic Fit and Purpose

Before looking at the rates, does this product solve the specific problem?

• Identify the use of funds.‍
  
  • Is this for mobilization (materials/equipment), payroll (labor), or a retainage bridge?
  • If for materials, does a supplier-direct solution (like Billd) offer better terms than cash loan.

• Match terms to the project lifecycle.
  
  • Does the repayment term match the project's billing cycle? (Avoid taking short-term, daily-debit loans for projects with 60–90-day pay cycles.)

• Assess impact on surety/bonding.
  
  • Will this lender file a UCC-1 blanket lien on business assets?
  • If yes, have we consulted our surety agent? (Blanket liens can severely reduce bonding capacity.)

2. The True Cost of Capital

Moving beyond the "headline rate" to find the APR.

• Calculate the annualized rate.‍
  
  • If the offer uses a "Factor Rate" (e.g., 1.03x), have we calculated the true APR? (A 3% fee on a 30-day term is ~36% APR).

• Identify origination and processing fees.
  
  • Are there "draw fees," "origination fees," or "service fees" deducted from the funding amount upfront?

• Check for unused line fees.‍
  
  • For LOCs, is there a fee for not using the money?

• Analyze margin erosion.‍
  
  • Is the cost of this capital lower than the net profit margin of the project it’s funding?

3. Risk and Collateral

What is at stake if the GC pays late or the project stalls?

• Check personal guarantees (PG).‍
  
  • Does this require a PG from the owners? Are the owners willing to sign?

• Understand notification and assignment.‍
  
  • For factoring, will the lender contact our client?
    
  • Does our contract with the GC allow for assignment of payments? (Many standard GC contracts prohibit this.)

• Check for “Confession of Judgment.”‍
  
  • Does the contract include a Confession of Judgment clause? (Red flag warning! This waives your right to defend yourself in court.)

4. Operational Logistics

How much friction will this add to the accounting workflow?

• Understand speed-to-fund.‍
  
  • Can we draw funds within 24–48 hours of a request?

• Know the reporting requirements.‍
  
  • Does the lender require monthly borrowing base certificates, WIP reports, and/or A/R aging summaries? Do we have the staff bandwidth to provide these?

• Check integrations.‍
  
  • Does the platform integrate with our ERP (Sage, QuickBooks, Procore)?

5. The Exit Strategy

How do we get out?

• Note any prepayment penalties.‍
  
  • Can we pay the loan off early to save on interest? (Some financing charges the full interest regardless of when you pay).

• Identify renewal terms.‍
  
  • Is this a one-time bridge or a revolving facility?

Shrinking the Gap

While external capital is a powerful lever for growth, the ultimate goal for any commercial subcontractor is to reduce the need for it through operational efficiency. This means tightening billing practices (by using tools like Siteline) to ensure requisitions are flawless and approved quickly, negotiating better terms with GCs, and aggressively following up on past-due invoices to reduce DSO.

Credit lines will always have a place—especially as subs take on more work and need to front materials and labor—but streamlining billing and improving collections can majorly shrink the gap between cash-out and cash-in. And it is possible. As our State of Subcontractor Billing shows, Siteline customers beat the national DSO for construction by 44%. 

Ultimately, understanding your cash flow and backlog tells you how and when to shore up your business. By combining strategic subcontractor cash flow analysis, streamlined A/R workflows, and the right (and timely) mix of traditional and construction-specific financing, you and your accounting team keep the scales balanced as much as possible throughout the project lifecycle.