What your balance sheet says: you have $2M in accounts receivable, same as any other business with $2M in AR.

What a lender sees: construction receivables that carry retainage holdbacks, depend on progress-billing milestones, sit behind conditional payment terms, and may or may not be protected by lien rights. The dollar figure is the same. The collectibility is not, and that gap is exactly what a credit team prices. If you run a construction or trades business and wonder why your borrowing base always comes back smaller than your AR balance, this is why.

Why construction AR is different

In most businesses, an invoice means the work is done and payment is due on terms. In construction, an invoice can mean a lot of things, and most of them are conditional:

  • The billing may be a progress draw against a percentage of completion, not a finished deliverable.
  • A slice of every payment is held back as retainage until the whole project finishes and is accepted.
  • Payment often depends on the owner or general contractor getting paid first (pay-when-paid or pay-if-paid clauses).
  • The receivable’s real security is your lien and bond rights, which have strict deadlines and can be waived away in the paperwork.

Each of these makes the receivable less certain, and lenders underwrite certainty.

Retainage: the money you earned but can’t borrow against

Retainage is the classic construction haircut. On most projects, the owner holds back 5% to 10% of every progress payment until final completion and acceptance. That money is yours, you earned it, but you can’t collect it until the end, and sometimes the end is a year away and contingent on a punch list you don’t fully control.

Worth knowing that this convention is not universal, and the difference is worth money. On federal fixed-price construction, FAR 52.232-5 does not permit routine retainage at all. The contracting officer may retain a maximum of 10 percent only “if satisfactory progress has not been made,” and must release withheld funds once the work is substantially complete. So a contractor whose work is on schedule should not be carrying a standing federal retainage balance. If you are, that is a conversation to have with the contracting officer, not a cost of doing business.

To a lender, retainage receivables are among the least fundable assets you have. They’re deferred, contingent on project completion, and often the first thing to evaporate in a dispute. Most borrowing bases either exclude retainage entirely or advance against it at a steep discount. If a big share of your AR is retainage, your effective borrowing base is far smaller than your AR total suggests.

Progress billings and the completion question

A progress billing is a claim that you’ve completed a percentage of the contract and are owed for it. The lender’s question is whether that percentage is real and accepted, or optimistic. Over-billing (billing ahead of actual completion) inflates AR today and creates a hole later when the work has to catch up. A credit team looks hard at billings-in-excess-of-costs and costs-in-excess-of-billings on your work-in-progress schedule, because that’s where the true picture lives. Your WIP schedule, not your AR aging, is the document that decides how a construction file gets read.

Pay-when-paid, pay-if-paid, and contingent collection

Subcontractor receivables often carry pay-when-paid or pay-if-paid clauses. “Pay-when-paid” delays your payment until the GC is paid. “Pay-if-paid” can mean you don’t get paid at all if the owner never pays the GC, shifting the credit risk of the project owner directly onto you. A lender reads a book full of pay-if-paid receivables as a book where collection depends on parties you don’t control. That’s a concentration and dependency risk, and it lowers the advance rate.

Lien and bond rights: your real collateral

The thing that actually protects a construction receivable is your right to file a mechanic’s lien or make a bond claim. On federal work those bond rights are statutory: the Miller Act (40 U.S.C. 3131) requires a payment bond on federal construction contracts above $100,000, protecting “all persons supplying labor and material in carrying out the work provided for in the contract.” That is why a lender will ask whether a job is federal, state, or private before deciding what your receivable is worth: the recovery path is different in each case. Those rights have unforgiving deadlines (preliminary notices, notice-of-intent windows, filing periods) that vary by state, and they can be signed away in lien waivers you sign to get each progress payment. A lender financing construction AR cares intensely about whether your lien rights are preserved, because a receivable backed by valid lien rights is worth far more in a default than a bare unsecured claim. Sloppy lien-waiver management quietly destroys the security behind your own receivables.

How to make your construction AR more fundable

You can move the needle before you ever talk to a lender:

  • Keep a clean, current WIP schedule. It’s the single most persuasive document you have. Under-billing looks conservative; chronic over-billing looks like a hole forming.
  • Track retainage separately and be realistic that it isn’t near-term liquidity.
  • Preserve lien and bond rights on every project, and manage lien waivers so you’re not unknowingly releasing your security.
  • Know your contract terms. Flag pay-if-paid clauses and concentration in a single owner or GC before a lender does.
  • Separate bonded from unbonded work in how you present the book; they carry different risk.

Construction is fundable, and specialized lenders underwrite it every day. The businesses that get the best terms are the ones that present the receivables the way a credit team already reads them: net of retainage, backed by preserved lien rights, and supported by a WIP schedule that tells the truth.

Run your own file first

Want to see how a credit team would read your construction receivables, retainage and all? Run the assessment or send us your WIP schedule and AR aging and we’ll tell you where the real borrowing base sits.

Educational only. Nothing here is an offer of credit, a commitment to lend, or advice on any specific transaction.