Contractors usually match three financing tools to three problems: equipment financing for machines and trucks, a line of credit for materials and mobilization, and invoice factoring or AR financing for slow-paying jobs. Retainage, typically 5% to 10% of each progress payment, and pay-when-paid clauses are why construction cash gaps run longer than in most industries.
Why is cash flow so tight in construction?
Because you pay for most of a job before you get paid for it. The sequence on a typical commercial job:
- Mobilization. Crew, equipment, permits, and insurance costs hit in the first weeks.
- Materials. Suppliers want payment on their terms, often before the work that uses the materials is billed.
- Progress billing. You submit a monthly pay application. The architect or owner reviews it, and payment follows weeks later.
- Pay-when-paid. If you're a subcontractor, your contract may tie your payment to the general contractor getting paid by the owner first.
- Retainage. The owner or GC holds back a percentage of every payment until the project, or your scope, is complete. Many states cap it at 5% or 10%, and California lowered its cap on private projects to 5% as of January 1, 2026.
What does a slow-paying job look like in real numbers?
Say an electrical subcontractor wins a $400,000 job over five months. It bills $80,000 a month, the GC holds 10% retainage, and each payment arrives about 60 days after billing. Materials cost $120,000, bought mostly up front, and labor runs $35,000 a month.
| Month | Costs out | Payments in | Cumulative cash position |
|---|---|---|---|
| 1 | $105,000 | $0 | −$105,000 |
| 2 | $85,000 | $0 | −$190,000 |
| 3 | $35,000 | $72,000 | −$153,000 |
| 4 | $35,000 | $72,000 | −$116,000 |
| 5 | $35,000 | $72,000 | −$79,000 |
| 6 | $0 | $72,000 | −$7,000 |
| 7 | $0 | $72,000 | +$65,000 |
| Closeout | $0 | $40,000 retainage | +$105,000 |
Each payment is $80,000 minus 10% retainage, or $72,000. The job earns $105,000 in the end, but the contractor has to carry up to $190,000 of its own cash in month 2 to get there, and doesn't break even until month 7. Winning two jobs like this at once doubles the hole.
That peak is the number financing has to cover.
Which financing fits which construction cost?
| What you need to pay for | Product that fits | Why | Range through Sagamore |
|---|---|---|---|
| Excavators, loaders, lifts, trucks, trailers | Equipment financing | The equipment is the collateral; terms match its useful life | $10K to $5M |
| Materials, mobilization, payroll between draws | Line of credit | Draw per job, repay when the draw pays, reuse | $5K to $500K |
| Approved pay applications waiting on payment | Factoring or AR financing | Turns billed work into cash now | $10K to $5M / $25K to $5M |
| A one-time gap with a known payout, such as retainage release | Bridge loan | Short term, repaid from the specific event | $25K to $1M |
| Growth: a larger crew, an estimator, a bigger bid | Term loan | Fixed payments over 6 to 60 months | $10K to $2M |
| A yard, shop, or office building | Commercial mortgage or SBA 504 | Long terms for real estate | $100K to $5M+ (commercial mortgage) |
The mistake to avoid is using one tool for everything, such as a short-term advance to buy a machine you'll run for eight years, or a five-year loan to cover a 60-day receivable. Our construction financing page walks through each of these uses on its own.
How does equipment financing work for contractors?
The lender pays the dealer, you get the machine, and you make fixed payments over a term matched to the equipment's useful life. Lenders can finance up to 100% of the cost, new or used, which keeps your cash free for materials and payroll.
Should you rent, lease, or finance?
| Rent | Lease | Finance | |
|---|---|---|---|
| Best when | You need it for one job or a few weeks | You want to upgrade on a cycle | You'll use it steadily for years |
| Who owns it | Rental company | Leasing company, with a possible buyout | You, once it's paid off |
| Monthly cost | Highest per month of use | Moderate | Moderate, and it builds equity |
| Maintenance | Usually the rental company | Depends on the lease | You |
A quick way to decide: compare the monthly loan payment with what you'd spend renting.
Say you're weighing an $85,000 compact track loader, financed for 60 months at an assumed 9% rate. The payment works out to about $1,764 a month. If renting a comparable machine costs you $3,500 a month and you need one eight months a year, that's $28,000 a year in rent versus about $21,200 a year in loan payments, and at the end of five years you own the loader. If you only need one two months a year, rent. Use your own dealer and rental quotes; the rates here are placeholders.
What about taxes?
For tax year 2026, the Section 179 deduction limit is $2,560,000, and the deduction phases out once qualifying equipment purchases exceed $4,090,000. The One Big Beautiful Bill Act, signed in July 2025, also made 100% bonus depreciation permanent for qualifying property acquired after January 19, 2025. Together they can let a business deduct the full cost of equipment in the year it's placed in service, even when it's financed.
A deduction isn't cash, and your situation may differ. Confirm with your tax advisor before counting on it.
Can contractors factor progress billings?
Yes, but construction factoring is its own niche. Many general factoring companies avoid construction because of the complications: progress billing, retainage, pay-when-paid clauses, lien rights, and multiple parties in the payment chain. Factors that do work in construction typically:
- Advance only against approved pay applications or completed-work invoices
- Exclude retainage from the advance
- Require lien waivers and proof that suppliers and lower-tier subs have been paid
- Verify the GC's or owner's payment history
Using the example above, factoring the $72,000 net payment on each pay application at an assumed 85% advance puts $61,200 in your account shortly after the application is approved, instead of 60 days after billing. Pulled forward month by month, that cuts the $190,000 peak substantially. A line of credit covers what's left.
Factoring or AR financing? With factoring, the GC or owner is notified and pays the factor directly. With AR financing, you borrow against your receivables and keep collecting yourself, so the arrangement stays between you and the lender. Some contractors prefer AR financing to keep their GC relationships simple.
How do lien rights affect construction financing?
Mechanics' lien rights are one of the few protections subcontractors and suppliers have when they don't get paid, and lenders and factors pay attention to them. Deadlines for preliminary notices and lien filings vary by state and are strict. If you finance receivables, expect your lender to ask for lien waivers at each draw. Talk to a construction attorney about your state's rules.
What do lenders look for in a contractor's application?
Beyond Sagamore's minimums of 1+ year in business, $400,000+ in annual revenue, and a 600+ credit score, construction lenders often ask for:
- 3 to 6 months of business bank statements
- An accounts receivable aging report
- A work-in-progress (WIP) schedule showing contract values, billings, and costs to complete
- Signed contracts or a backlog summary
- Contractor's license and insurance certificates
- Equipment quotes, for equipment financing
A clean WIP schedule and an AR aging that shows who owes you, and how late they are, go a long way toward a faster decision.
How would the electrical sub put it together?
For the $400,000 job above, a workable setup:
- Equipment financing for the bucket truck and lifts, so no job cash goes to machines
- A line of credit to cover materials and the first two months of labor, repaid as payments arrive
- Factoring or AR financing on approved pay applications to pull payments forward and shrink the line balance
- A bridge loan, if needed, against the $40,000 retainage when closeout drags
Each tool covers the cost it fits, and none of them is carried longer than the gap it closes.
If you're bidding bigger jobs and want financing in place before you're carrying the costs, start an application. The initial review is a soft credit pull, and one application covers equipment, lines of credit, and receivables financing.
