Construction, CIS and business finance in the UK

Construction is one of the largest UK SME sectors by headcount and one of the most distinctive in finance terms. CIS deductions, retention clauses, pay-when-paid contracts and project-driven cashflow mean the standard finance products fit awkwardly without sector-aware underwriting. Mainstream lenders that do not understand construction often decline what specialist construction-aware lenders are happy to fund. This guide walks through the specific dynamics and the products that typically fit.

How the Construction Industry Scheme affects finance underwriting

Under CIS, contractors deduct 20% (registered subcontractors) or 30% (unregistered) from payments to subcontractors and pay it directly to HMRC against the subcontractor's tax liability. The net amount lands in the subcontractor's bank account; the gross amount appears in invoices. For finance underwriting this creates a gap — the bank statements show only the net, but the trading turnover is the gross.

Sector-aware lenders model gross turnover before CIS deductions and ask for evidence of CIS returns and HMRC reconciliations. Non-sector lenders sometimes model only the net showing on bank statements, which understates the business by 20% to 30%. This is the single biggest reason construction businesses get under-quoted by mainstream lenders.

Retentions and pay-when-paid

UK construction contracts routinely include retention clauses (typically 3% to 5% of contract value held back until practical completion plus 12 months) and pay-when-paid clauses (the subcontractor is paid when the main contractor is paid by the client). These extend the working-capital cycle materially. A subcontractor on a 12-month project may not see retention released until 24 months after starting the work. Invoice finance underwriting has to adapt; many mainstream IF lenders restrict construction or apply lower advance rates because of these dynamics.

Asset finance: the workhorse for construction kit

Plant, vehicles, scaffolding, telehandlers, dumpers, excavators, generators, mixers and commercial vehicles all fit well into asset finance. Mainstream providers — Lombard, Novuna Business Finance, Propel Finance, Simply Asset Finance — cover construction kit routinely. Specialist construction asset finance lenders handle older or more bespoke plant.

Hire purchase is the most common structure. New plant typically requires 10% to 20% deposit; used plant often runs 15% to 25%. Residual values on mainstream plant are strong because of the deep UK secondary market, which keeps monthly costs down. Refinancing existing plant to release working capital is also common — owned plant sat on the balance sheet can be refinanced as an asset-finance facility to free cash for materials or wages.

Invoice finance: where the sector fit gets specific

Construction invoice finance is a specialist sub-market. Only some UK providers — Bibby, Skipton Business Finance, Time Finance — confidently underwrite construction with full knowledge of pay-when-paid, retention and contractual set-off dynamics. Mainstream IF lenders sometimes restrict the sector entirely or apply lower advance rates (typically 65% to 80% versus 80% to 90% for clean B2B sectors).

Construction-aware invoice finance can fund certified applications for payment (the JCT and NEC standard payment claims), not just final invoices. This matters because most construction cashflow is bridged not from final invoice but from interim applications during the project. Stage-payment finance and contract finance are also available from specialist providers for confirmed customer orders ahead of work.

Unsecured working capital and the gross-versus-net question

Unsecured loans for construction businesses — from iwoca, Funding Circle and similar — require careful application presentation. The lender will pull bank statements and see only net receipts. The applicant needs to volunteer CIS returns, HMRC reconciliations and statutory accounts that show gross turnover, so the lender can model the real trading picture.

Tip: prepare a 12-month CIS reconciliation showing gross turnover, CIS deductions paid, net receipts and HMRC settlement timing. This is a 1-page summary that materially strengthens an unsecured loan application. Lenders rarely ask for it explicitly but always appreciate it when it's provided.

Bridging and development finance for construction

Property development and major refurbishment finance routes to bridging and development lenders — Together, Hampshire Trust Bank, United Trust Bank — which release funds in tranches against build milestones. Construction firms doing their own developments often combine a development bridge for the property with asset finance for the kit and an unsecured working capital line for materials.

Common blockers for construction applications

• Mainstream invoice finance lenders restricting the sector entirely.
• Single main contractor concentration over 30% of revenue — reduces advance rates and tightens underwriting.
• Recent HMRC arrears on PAYE, VAT or CIS — appears on the business credit file and on HMRC searches.
• Sole-trader subcontractors with limited accounting infrastructure — harder for larger unsecured facilities.
• Adverse credit on directors common in cyclical sub-sectors (groundworks, roofing) — narrows lender pool.
• Stage-payment and milestone contracts complicating single-invoice finance eligibility.

Documentation construction lenders expect

• Last 2 years of filed accounts plus latest management accounts.
• Last 12 months of business bank statements.
• CIS returns and HMRC payment evidence (last 6 to 12 months).
• Aged debtor report including main contractor breakdown.
• Sample contracts and certified applications for payment.
• Plant schedule with current valuations (for asset finance).
• VAT registration evidence and last 4 VAT returns.

Structuring the finance stack for a construction business

Well-financed UK construction businesses typically combine three facilities. An asset finance line covering plant and vehicles, refinanced as new kit comes in. A construction-aware invoice finance facility against certified applications and final invoices. An unsecured working capital line for materials and wages between applications. The combination matches the cashflow shape — long-term debt against long-term assets, short-term debt against short-term needs.

Sub-sector differences

• Groundworks: heavy plant-driven; asset finance and invoice finance dominate.
• M&E (mechanical and electrical): often more office-based, less plant; unsecured working capital tends to fit.
• Roofing: project-driven, materials-heavy; unsecured working capital plus asset finance for vehicles.
• Civils: high-value contracts, long retentions; specialist construction invoice finance plus asset finance.
• Domestic builders and small contractors: usually unsecured working capital plus asset finance for vans.