Industry
Construction Merchant Cash Advance Debt and Slow Draws
Construction is the only industry on this list where you are expected to finance your customer. You mobilize, buy material, run payroll weekly, submit a pay application at the end of the month, wait for the architect or owner to certify it, then wait again for payment, and you never see the last five to ten percent until the punch list closes months later. That is the normal cycle, and it consumes cash even on profitable jobs. A merchant cash advance sits on top of it, withdrawing every business day regardless of whether a draw cleared, which turns an ordinary slow pay cycle into a default.
The situation
Five ways the draw cycle and the debit collide
You Fund the Job for 60 Days Before the First Draw Lands
Material is purchased at the start, labor is paid weekly, and the first payment arrives after the pay application is certified and the payment terms run. On public work and under pay when paid clauses, that stretch can run longer. A daily debit during the mobilization phase consumes exactly the working capital that was supposed to carry the job to its first draw.
Retainage Is Your Profit, Held Until the Punch List Closes
Five to ten percent held on every progress payment is often the whole margin on the job, sitting in someone else's account until substantial completion, closeout documents and lien releases are finished. On a large project that is a six figure sum that exists on your balance sheet and not in your bank. Advance funding underwritten off deposits treats it as though it were spendable.
An Unsigned Change Order Is Work You Already Paid For
Field directives get executed before the paperwork catches up. The labor and material go out the door immediately, the change order sits unapproved for weeks or months, and the disputed amount is not in any pay application. Every one of those is an interest free loan from you to the project, funded from the same account the advance is debiting.
Unpaid Suppliers File Liens, and Liens Reach the Owner
When your material supplier is not paid, it does not sue you first. It sends a preliminary notice and then files a mechanics lien against the owner's property or makes a claim on the payment bond. That puts the general contractor and the owner in the middle of your cash problem, and most prime contracts treat a lien from your lower tier as an event of default.
Bonding and Prequalification Read Your Balance Sheet
Surety underwriters and general contractor prequalification departments look at working capital, and an advance position damages both the working capital ratio and the story behind it. A reduced single job limit or a lost prequalification can close off the work that would have solved the problem.
How it works
From pay application to lien notice, step by step
Milestone Revenue Against a Daily Debit
Construction revenue is lumpy by design. Money arrives in large certified payments at irregular intervals, and the gaps between them are where a company lives or dies. A flat daily withdrawal does not recognize gaps. It simply keeps drawing, so a firm that is entirely solvent across a quarter can return a debit in the third week of a month with no draw in it.
Where an Advance Sits Relative to Your Bond, Your Bank and Your Suppliers
A surety holds an indemnity agreement that can reach the company and the owners. A bank line typically holds a first UCC filing on everything. Suppliers hold lien rights against the project. An advance company files a UCC on receivables and relies on whatever the owner signed personally. Knowing that order matters, because a plan that ignores the surety or the bank to satisfy a funder can cost far more than it saves.
Stacking During a Slow Pay Cycle
The second advance almost always funds during a gap between draws, when the pressure is highest and the terms are worst. Later positions carry higher factor rates over shorter terms, so the combined daily figure lands in the same trough that caused the borrowing. When the draw finally clears, most of it goes to the advances rather than to the next job's mobilization.
A framing sub with two positions and a slow draw, illustrated
Hypothetical mechanical subcontractor doing about 2.4 million dollars a year, with 200,000 dollars billed in the month, 10 percent retainage held, a 38,000 dollar change order unapproved, and two advances outstanding: 120,000 dollars at a 1.42 factor rate and a stacked 60,000 dollars at 1.49.
- Daily debit
- About 2,303 dollars withdrawn every business day across both positions, whether or not a pay application was certified that month.
- Per week
- Roughly 11,515 dollars a week, landing in the same week certified payroll is due on the public job.
- Per month
- About 48,363 dollars over 21 business days, against roughly 158,000 dollars actually collected on 200,000 dollars billed.
A hypothetical illustration built from figures common in specialty trade subcontracting. It is not a client file, not an average, and not a prediction of any outcome.
Jobsite and office warning flags worth a hard look
- A draw from one job has been used to cover payroll on another.
- A supplier has sent a preliminary notice or threatened a lien on a job you are currently working.
- Your surety has asked for updated financials or reduced your single job limit.
- You are bidding to win the mobilization payment rather than for the margin.
- Retainage from a completed job is more than ninety days late and nobody has pushed for it.
- A second advance was funded during a gap between draws to make the first one's payments.
- You are delaying equipment maintenance or rental returns to preserve cash for the debit.
Results vary and are not guaranteed. Figures describe past negotiations and do not predict the outcome of any individual case. No result is promised or implied.
Where the Money Actually Sits on a Job
Ask a contractor how the job is going and the answer is usually about schedule. Ask where the money is and the picture changes: some in unbilled work in progress, some in a pay application awaiting certification, some in retainage that will not release until closeout, some in a change order that has been sitting on a project manager's desk since March. Very little of it is in the bank on any given Tuesday.
That is normal. Construction has always financed itself across those gaps, and companies that understand their draw cycle survive them routinely. What has changed is the availability of daily debit funding that ignores the cycle entirely.
How an Advance Enters the Picture
The trigger is almost always a gap, not a loss. A general contractor stretched from thirty days to sixty. A change order was directed verbally and never processed. A supplier tightened terms mid project. Payroll is Friday and the certified payment is three weeks out. Advance funding closes in forty eight hours with four months of bank statements and no financial statements, no surety consent, no covenants.
The cost surfaces later. The payback is sized against deposits, and construction deposits are large relative to margin, so the resulting daily figure is enormous compared with what the company actually keeps. A firm doing 200,000 dollars a month in billings might net five to eight percent in a good year. The debit does not know that.
Liens, Bonds and the Chain Reaction
This is what separates construction from every other industry here. In a restaurant, an unpaid vendor stops delivering. In construction, an unpaid supplier files a notice that lands on the owner's property, which puts you in default under your prime contract, which can get you removed from the job, which triggers a claim against your payment bond, which activates your surety's indemnity rights against you personally. One missed supplier payment can travel that entire chain in under sixty days.
Any plan that does not account for that sequence is not a plan. Supplier balances on active jobs, bond obligations and prequalification standing all get mapped before a proposal goes anywhere.
Restructuring Around Draw Cycles
Restructuring converts a daily withdrawal into a schedule that reflects how construction money actually arrives. That means documenting the job schedule, the billing schedule, retainage held by job, and the realistic collection date for each open receivable. Funders evaluate whether a modified structure collects more than a contractor who shuts down mid project, and a contractor who shuts down mid project generates bond claims and collects nothing.
Negotiating a Balance Down
Where the schedule cannot work under any structure, the negotiation targets the balance. Across the industry, past negotiations have resolved balances in a range of 40 to 60 cents on the dollar depending on the funder, the age of the position and the strength of the documentation. That describes prior negotiations rather than a forecast, and results differ by file.
Judgments, Levies and Defense
If a funder has sued or obtained a judgment, the exposure widens quickly, because a judgment creditor has remedies a contract alone does not. Experienced MCA defense counsel handles the lawsuit, and we work the negotiation with the funder alongside it. The projects still have to be built while that proceeds.
Before You Sign the Next One
Put every position, every open job, every retainage balance and every unapproved change order on a single schedule. Most contractors have the pieces in three different systems and have never seen them together. That schedule is what turns a vague cash problem into a solvable one.
Questions
Questions contractors and subs ask before they call
Will an advance show up when a general contractor prequalifies me?
Prequalification packages typically ask for financial statements and a bank reference, and UCC filings are public. An advance affects the working capital figure that prequalification and bonding both examine. Presenting a documented restructuring plan is generally received far better than an unexplained working capital gap, which is one reason getting ahead of it has practical value.
Can a funder reach money that is owed to me on an open project?
Funders file UCC financing statements on accounts and may send notices of assignment to the general contractor or owner. In practice that frequently causes the paying party to hold funds entirely while it sorts out competing claims, which hurts everyone including the funder. Whether the claim is valid against a specific project payment involves lien law and contract law, and it is reviewed by experienced MCA defense counsel.
What happens to my bond and my surety relationship?
A surety is not a lender and its indemnity agreement usually reaches both the company and the owners personally. Sureties respond badly to surprises and reasonably well to a documented plan. Because the surety relationship is often the most valuable asset a contractor has, it is mapped early rather than discovered late.
I have retainage coming from a job that closed. Can it be protected while this is worked out?
Retainage is money owed to you, and pursuing it is usually part of the plan rather than something to postpone. Where competing claims exist, the sequence of collection and payment matters, and it is worked out with counsel so that collecting it does not create a new problem with a supplier, the surety or a funder.
Does a lien filed by my supplier put me in default on my prime contract?
Most prime contracts and subcontracts contain provisions requiring the contractor to keep the project free of liens from lower tier parties, so yes, it commonly does. That is why supplier balances on active projects are frequently prioritized differently from other obligations when a plan is built.
Should I keep bidding new work while this is being negotiated?
Bidding work you can actually staff and finance is what makes a company worth restructuring. Bidding work primarily to capture a mobilization payment is what created the problem in the first place. The distinction is whether the job stands on its own margin and schedule.
My company is an S corporation but I signed personally. Which one is being negotiated for?
Both, because a funder holding a personal guaranty will pursue both. The company's capacity to pay and the individual exposure are usually addressed together in a single negotiation. What the guaranty actually covers, and whether it is enforceable as drafted, is a legal question reviewed before any commitment is made.
Next step
Quit financing the funder on top of financing the job
Tell us the balances, the draw schedule and what retainage is still outstanding. We will lay out a payment schedule that follows your pay applications instead of the calendar.
About a minute
- Two questions about your positions
- No documents, no credit pull
- Nothing that touches your file
Services are not available in all states.