Construction Business Loans: Financing Contractors Between Draws

By MercFinancial · Published 2026-10-21

Construction business loans fund the gap between the contractor's costs and the owner's draw: lines of credit, mobilization funding, equipment financing, factoring and SBA-backed loans. Who writes each one, and what the file needs.

Construction business loans exist in five forms, and each one funds a different gap: a line of credit for payroll and materials between draws, mobilization funding to start a job before the first pay application, equipment financing for the machines and trucks, invoice factoring and retainage advances against progress billings, and SBA-backed loans for a shop, a yard, an acquisition or permanent working capital. Banks write the first and the last for established contractors with clean work-in-progress schedules. Specialty lenders write the rest, and they write them for contractors the bank passed on.

This guide covers each product, who offers it and what it is for, how bonding capacity shapes what a contractor can borrow, what a lender underwrites in a contractor file and the documents to have ready, the mistakes that get contractors declined, and how MercFinancial places a construction and contractor funding request with the funding sources whose policy allows the trade.

A contractor does not have a revenue problem between draws. It has a timing problem, and timing problems are what credit is for.

Why construction is a hard industry to fund

Banks decline contractors for structural reasons rather than personal ones. Revenue is recognized on percentage of completion, so the profit and loss depends on estimates the bank cannot test without a work-in-progress schedule. Cash arrives in draws that lag the costs by months, retainage holds back part of every billing until the job closes, and pay-when-paid clauses push the general contractor's delay down to every subcontractor. A bad job can erase a year of profit, and a lien or bond claim can appear long after the work is done.

None of that is law. Contractors are not among the businesses the SBA excludes under 13 CFR 120.110, and a licensed, bonded contractor is eligible for SBA-backed lending subject to the lender's own credit policy. The decline is about how the bank reads the file, and the file that gets read differently is described in why banks decline contractors. The capital below exists because other lenders built products around the gaps the bank cannot underwrite.

The capital that exists for contractors, product by product

• Lines of credit. A bank revolving line, sized to backlog and the work-in-progress schedule, funds payroll and materials between draws and is paid down as draws arrive. Asset-based lenders write a similar line against eligible receivables for contractors the bank declines. Sizing and covenants are in contractor lines of credit and mobilization funding.
• Mobilization and materials funding. Specialty lenders advance the cost of starting a specific job, or pay the material supplier directly, and are repaid from the first draws. The contract, the owner and the schedule of values are the underwriting, not the contractor's balance sheet.
• Equipment financing and leasing. Excavators, cranes, trucks and fleets are financed on the equipment itself by equipment lenders and manufacturer programs, with the machine as collateral. It is usually the easiest contractor loan to place.
• Invoice factoring and retainage advances. Construction factors buy verified progress billings, advance most of the invoice and remit the rest when the owner pays, and a few advance against retainage. The mechanics and limits are in construction invoice factoring and retainage.
• SBA-backed loans. A 7(a) loan funds a shop or yard, an acquisition, equipment or permanent working capital through a bank whose policy allows contractors. The SBA's CAPLines family includes a contract line built for the costs of performing a specific contract, though few lenders write it routinely.
• Unsecured term loans and revenue-based financing. Available to most contractors with deposits and owner credit, fast, and expensive. They fit a short, specific gap and rarely fit a business that lives between draws all year.

Bonding capacity and the SBA surety program as context

Bonding and borrowing are read together, and a contractor should understand that before applying for either. A surety sets bonding capacity on the contractor's working capital, net worth, work-in-progress and history, and it reduces capacity when the contractor takes on debt it cannot see the purpose of. A lender, in turn, reads the surety's capacity letter as a second opinion on the contractor's financial condition. The two feed each other: a line of credit that improves working capital can raise capacity, and a term loan with no clear use can lower it.

Small contractors who cannot get bonded on their own can look to the SBA's surety bond program under 13 CFR Part 115, which backs a participating surety against part of its loss on bid, performance and payment bonds for eligible small businesses. It is a route to larger public work, not a loan, and the surety still underwrites the contractor. The loan-side requirements are summarized in the SBA loan requirements checklist.

What the lender underwrites and the documents to have ready

Whatever the product, a construction lender is reading for whether the jobs are profitable, whether the draws will arrive and whether the contractor knows both answers.

Mistakes that get construction loan files declined

Most contractor declines trace to the file rather than the business, and each of these is fixable before it goes out.

• Applying with tax returns and no work-in-progress schedule, which forces the lender to guess at job profitability, and most guess no.
• Under-billing on open jobs, which looks like losses, and over-billing, which looks like revenue already spent, with no line of explanation for either.
• Pledging the same receivables to a factor and a bank line.
• Treating retainage as cash that is coming, when the lender treats it as cash that may not.
• Taking a daily-debit advance to make payroll and then applying for a bank line with the debits in the statements.
• Letting a lien deadline pass on an unpaid job and borrowing to cover the loss instead of filing.

Where MercFinancial fits

MercFinancial is a commercial funding brokerage in Houston, Texas, not a lender, and a contractor's request is placed the way every file is. A funding specialist reads the work-in-progress schedule, the backlog, the aging and the bonding letter first, then identifies which of the more than 160 funding sources in the network have a credit policy that allows contractors and the structure requested: banks and asset-based lenders for the line, specialty lenders for mobilization and materials, construction factors for the billings, equipment lenders for the fleet, and SBA lenders for the shop or the acquisition. One file goes to all of them, the offers are compared on cost, term and covenants, and when nothing fits the answer is a plain no. Availability always depends on the funding source. The eight business funding programs cover the working capital, equipment and real estate pieces.

Frequently Asked Questions

Can a construction company get an SBA loan?

Yes. Contractors are not among the businesses excluded by 13 CFR 120.110, so a for-profit construction company is eligible for a 7(a) loan subject to the lender's own credit policy and the SBA's standard requirements on size, owner equity and repayment ability. The loan typically funds a shop or yard, an acquisition, equipment or permanent working capital. The SBA's contract line under CAPLines exists for job costs, though few lenders write it.

How do contractors get paid before the owner pays?

Through credit built for the gap. A line of credit funds payroll and materials and is repaid from the draw. Mobilization funding advances the cost of starting a job against that contract. Materials financing pays the supplier and is repaid from the draw that bills the materials. Construction factoring buys a verified progress billing and advances most of it within days. Each lender underwrites the job and the owner, not only the contractor.

What is a WIP schedule and why do lenders ask for it?

A work-in-progress schedule lists every open job with its contract value, costs to date, estimated cost to complete, revenue earned to date and amount billed to date. It shows whether each job is profitable and whether the contractor is over-billed or under-billed. Lenders ask for it because tax returns and bank statements cannot answer those questions for a percentage-of-completion business. A clean WIP moves a contractor from declined to considered.

Can a new contractor get a business loan?

Often, but not from a bank. A contractor with less than two years of history and no reviewed financials is usually declined for a bank line. Equipment financing on the machine, factoring on a verified billing to a creditworthy owner, mobilization funding against a signed contract, and unsecured products on the owner's credit are available earlier, at a higher cost. The first clean WIP schedule and the first bonded job open the bank conversation.

Does borrowing hurt a contractor's bonding capacity?

It can, depending on the structure. A surety sets capacity on working capital and net worth, so a term loan with no clear purpose that adds debt without adding current assets can reduce it. A line of credit that improves working capital, or equipment financing that replaces cash spending, is usually neutral or helpful. Tell the surety before taking on significant debt, and expect the lender to ask for the capacity letter.

MercFinancial is a commercial funding brokerage in Houston, Texas. MercFinancial is a broker, not a lender: every loan is made by a third-party funding source, every request is subject to that source's underwriting and credit approval, and loan amounts, advance rates, interest rates, terms, fees, collateral and guaranty requirements vary by funding source and borrower and are not guaranteed. Nothing here is a commitment to lend or an offer of credit, and financing is for business purposes only. Any example in this guide is hypothetical and illustrative; actual terms and outcomes vary. Contractors are licensed and bonded under state and local law and lien rights vary by state; financing availability depends on the funding source's policies. This guide is educational only and is not legal, tax, accounting or investment advice.