Construction invoice finance: funding applications for payment

Construction invoice finance is a form of invoice finance adapted to the way construction contracts bill and pay. Instead of simple invoices for goods delivered, a contractor usually submits applications for payment for work done to date, the paying party values them, and the amount actually paid can differ from the amount applied for.

A specialist funder advances a proportion of the amount it judges to be genuinely collectable, then releases the balance, less charges, when the main contractor or client pays. Because the value of a construction debt is less certain than an ordinary invoice, funders look closely at each contract, the paying party and your record of getting applications agreed in full. Advances are typically more conservative than on a standard whole-turnover facility, and some funders lend only against certified or agreed amounts rather than the gross application.

This product is different from JCT contract funding, which provides money to start and carry out a specific contract before you have billed. Construction invoice finance funds work you have already done and applied for.

The Housing Grants, Construction and Regeneration Act 1996, as amended by later legislation, gives parties to most construction contracts in England, Wales and Scotland statutory rights around payment. Contracts must set out an adequate mechanism for working out what is due and when. The payer (or a specified person) should issue a payment notice stating the sum it considers due and how it is calculated. If the payer wants to pay less than the notified sum, it must serve a pay less notice within the time the contract (or the statutory scheme) allows before the final date for payment. Where no valid payment notice is given, the payee can in many cases rely on its own application or a default payment notice. The Act also gives a right to adjudication and, after notice, a right to suspend work for non-payment. Some contracts, such as most work for residential occupiers, fall outside these rules. You can read the legislation on legislation.gov.uk, and take legal advice on any specific dispute.

For funders, a contractor that tracks notices properly and enforces its rights is a lower risk. Missed pay less notices, or a habit of accepting late reductions without challenge, can weaken the value of your debts.

Several features of construction billing reduce what a funder can advance against, so it helps to understand each one before you apply.

• Retentions. The payer holds back a percentage of each payment until practical completion and the end of the defects period. Because release is often months or years away and can be disputed, most funders do not lend against retentions, or lend very little.
• Pay-when-paid. The Act makes most pay-when-paid clauses ineffective, except where a party further up the chain is insolvent. Funders still assess the main contractor and, where relevant, the end client, because a weak chain can delay payment in practice.
• Contra-charges and set-off. Main contractors may deduct sums for delays, defects, cleaning, attendance or damage. Funders reduce their view of your debts to allow for this, and a history of heavy contra-charges will limit the facility.
• CIS deductions. Under the Construction Industry Scheme, contractors deduct tax from payments to subcontractors on the labour element unless the subcontractor holds gross payment status. A funder advances against the net amount you will actually receive, so gross payment status can increase usable funding.

Illustration only. The figures are round and hypothetical, and every funder applies its own rules. A groundworks subcontractor submits an application for £100,000 of work to date. The main contractor's payment notice values it at £90,000, holds back £5,000 as retention and deducts a £3,000 contra-charge for site cleaning. A further £2,000 is deducted under CIS on the labour element. The subcontractor will actually receive £80,000.

A construction funder would typically base its advance on something close to that £80,000, not the £100,000 applied for, and would leave the retention out entirely. Understanding this gap before you apply avoids the disappointment of a facility that looks smaller than your ledger.

Many mainstream invoice finance providers exclude construction, or accept only simple supply-only invoices, because construction debts can shrink or be delayed after they are raised. Valuation disputes, variations, set-off, retentions and the knock-on effect of insolvency in the contract chain all make collection less predictable than with standard trade invoices. If a contractor fails mid-job, a funder may struggle to collect for partly finished work.

The lenders that do fund construction usually have specialist teams with quantity surveying knowledge, review contracts individually and monitor jobs more closely. That extra work and risk means construction facilities may be priced differently from general facilities, with more conservative advances, higher minimum fees or additional checking costs. Some prefer to fund selected contracts or customers on a selective invoice finance basis rather than the whole ledger.

Construction invoice finance typically suits contractors that work for established main contractors or public bodies, bill regularly and can show a track record of applications agreed close to the amount claimed. Common examples include:

• Specialist subcontractors in trades such as roofing, drylining, cladding and flooring
• Mechanical and electrical (M&E) contractors, including electrical contractors
• Groundworks and civil engineering firms (see our civil engineering funding guide)
• Labour supply businesses, which invoice on timesheets and are often easier to fund
• Plant hire and scaffolding businesses that invoice on hire periods
• Utility contractors working on framework agreements

It is harder to arrange for contractors working mainly for homeowners, businesses with a few large fixed-price contracts in dispute, or firms with recent losses or HMRC arrears. Suppliers to the trade, such as builders merchants, usually raise standard invoices and can often use mainstream facilities instead.

A construction facility typically takes around three to six weeks to set up, and sometimes longer for larger ledgers. Specialist funders often review contracts and sample applications individually, and may want to speak to main contractors or check payment histories. A selective line against one or two strong contracts can sometimes be arranged faster. Having contracts, notices and a clear debtor breakdown ready shortens the process.

Lenders usually take an assignment of the debts funded and a debenture over the company. Personal guarantees from directors are common in construction, often with warranties about the accuracy of applications and the absence of undisclosed disputes. Where a bank already holds a charge, a deed of priority is normally needed.

Construction facilities generally follow the standard invoice finance model: a service fee, calculated on turnover or invoices funded, and a discount charge on the money drawn, usually a margin over Bank of England base rate and charged daily. Because of the extra checking and risk, construction may be priced differently, with higher minimum fees, contract review or survey fees, and charges for disapproved applications. Whole-ledger facilities usually carry a minimum term and notice period, while selective facilities charge per invoice or contract. Ask for a full schedule of charges before you commit.

Depending on what you need the money for, other options can sit alongside or replace invoice finance:

• Contract funding to mobilise a new contract
• Plant and machinery finance for excavators, telehandlers and other equipment
• Short-term business loans for a specific gap in cash flow
• Asset refinancing to release cash from equipment you already own