Contractor Business Loan Underwriting: Lumpy Deposits

Contractor business loan underwriting looks past the month-to-month swings in a builder's bank statements to the jobs underneath them. Progress payments arrive in large, irregular deposits, retainage holds part of each payment back, and materials and subcontractors take most of what comes in. Lenders average a full year, match deposits to jobs and weigh signed backlog against past results.

Why do contractor bank statements swing so much?

Contractor bank statements swing because contractors are paid by job milestone, not by day or by week. A single progress payment can be larger than three months of smaller deposits. Between payments, the account drains as the contractor pays crews, buys materials and pays subcontractors, so both deposits and balances jump around.

Several features of construction work drive the pattern:

• Progress billing. The contractor bills as work reaches agreed stages and waits for the owner or general contractor to approve and pay.
• Long payment chains. A subcontractor waits for the general contractor, who waits for the owner, who may wait for a construction lender's draw.
• Weather and season. Outdoor trades slow in winter in many regions, while interior trades may not.
• Job size. One large job can dominate the year. When it ends, deposits fall until the next one starts.

A six-month window can catch the contractor at a peak or a trough. Lenders reviewing contractors therefore tend to ask for twelve months or more of statements, and they look at a trailing average rather than any single month.

Twelve months of example deposits

The figures below are an example for a fictional commercial electrical subcontractor. They are illustrative only.

The twelve-month total is $1,443,000, or about $120,000 a month. No single month is close to that figure. May, at $38,000, would make the business look like a small shop. June, at $265,000, would make it look twice its size.

Progress billing deposits in contractor statements

Progress billing deposits are the payments a contractor receives as a project reaches each billed stage. In contractor statements, underwriters match them to specific jobs by payer name and amount, which turns an irregular stream into a list of projects. That list is the real revenue base.

Matching deposits to jobs works best with a job list from the borrower: the customer, the contract value, the amount billed and the amount collected to date. The underwriter then checks:

• Payer names against the job list. Each large deposit should trace to a listed customer.
• Amounts against billed stages. Payments usually follow the schedule of values in the contract, so amounts should look like set shares of the contract.
• Concentration. A subcontractor working mostly for one general contractor depends on that firm's health and on its willingness to keep hiring them.
• Deposits with no matching job. These may be change orders, small service calls or something else entirely, and they need an explanation.

The same matching approach applies to other businesses paid in irregular, large amounts by a few payers. Medical practices waiting on insurance reimbursements face a version of it, explained in medical practice loan underwriting.

Retainage held back from contractor payments

Retainage is a share of each progress payment that the owner or general contractor holds back until the job is finished and accepted. It protects the payer against incomplete or faulty work. For contractor underwriting, it means deposits during a job are smaller than the work billed, and a lump of cash arrives at the end.

The share held back is set in each contract. Retainage has two effects on the bank statements:

• Deposits understate earned revenue during the job. The contractor has done the work and paid for it, but part of the payment sits with the customer.
• A large deposit arrives at closeout. That deposit is real, but it pays for work done months earlier and will not repeat next month.

Retainage also changes how a lender reads the end of a big job. Take an example subcontractor whose November deposits of $230,000 are triple the month before: that deposit could be a final payment plus released retainage on a job that started in spring. Counting it as one month of revenue would inflate the trailing average for the next quarter, and then the average would drop sharply once the job left the window.

Lenders handle it in a few ways. They ask for a schedule of retainage receivable by job, so they know how much is owed and when it is expected. They treat retainage releases as part of revenue spread over the job, not as a spike in one month. And they watch for retainage that has been owed for a long time after a job ended, which can signal a dispute over the work.

Material costs and subcontractor payouts in contractor debits

Material costs and subcontractor payouts are usually the largest outflows in a contractor's account, often taking most of each progress payment soon after it arrives. Reading these debits shows the contractor's real margin. A firm that keeps very little after paying suppliers and subs has little room for a loan payment, however large its deposits look.

What the underwriter reads in the debits:

• Supplier payments by name. Lumber yards, electrical and plumbing supply houses and equipment rental firms usually appear clearly.
• Subcontractor payments. Regular payments to the same small firms or individuals, often right after a progress payment lands.
• Payroll for field crews, including certified payroll on public jobs.
• Equipment loans and leases for trucks, lifts and heavy machinery.
• Bonding and insurance premiums, which tend to be large and periodic.

A useful check is gross margin by job. If a $200,000 progress payment is followed within two weeks by $160,000 in supplier and sub payments, the margin on that stage is about 20%. Repeated across several jobs, this gives a far better picture than the deposit total.

Cash pressure shows up in the debits too. Returned payments to suppliers, overdrafts after a payroll run and NSF fees in slow months tell the lender that the contractor finances its jobs from a thin cushion. How lenders count those events is explained in how lenders count NSF fees on bank statements.

How do lenders use backlog in contractor business loan underwriting?

Backlog is the value of signed work not yet billed. Lenders use it in contractor business loan underwriting to judge whether the next twelve months will look like the last twelve. Past deposits show capacity. Backlog shows whether there is work to use it. Strong backlog can offset a weak recent quarter.

Lenders do not take backlog at face value. They test it:

1. Ask for the contracts. Signed contracts, not proposals or bids.
2. Check the margin. Backlog priced too low to cover costs adds risk, not revenue.
3. Check the customers. Backlog from a general contractor or developer in financial trouble may never be paid.
4. Compare with history. A firm that billed $1.4 million last year and now claims $5 million in signed backlog has to show it can staff and bond that much work.
5. Watch the timing. Backlog that starts in nine months does nothing for the next two quarters.

A normalizing step list

With backlog in hand, underwriters often build a normalized revenue figure in a few steps:

1. Total twelve months of deposits from all business accounts.
2. Remove transfers between the borrower's own accounts, loan proceeds and owner injections.
3. Spread large retainage releases back over the jobs they belong to.
4. Compare the result with revenue on the tax return and the work-in-progress schedule.
5. Adjust for backlog only when contracts support it.

Averaging across a year of statements and several accounts takes time by hand. TrueBankFlow puts each month side by side, shows whether deposits and balances are trending up or down and flags large out-of-pattern deposits with the date and statement line, which helps when a retainage release lands in one month.

Larger contractors that also seek real estate or long-term equipment debt usually go through a fuller review of financial statements and guarantors, laid out in commercial loan underwriting.

Contractor deposit patterns that signal trouble

Some contractor deposit patterns suggest that the business is using money from new jobs to finish old ones. This is sometimes called a job-funding spiral, and it often ends badly once new work slows. The statements show it before the financial statements do.

Patterns that worry lenders:

• Deposits from a new customer followed by payments to suppliers of an old job. Upfront deposits on new work are paying off old bills.
• Growing backlog with shrinking balances. Taking more work while cash falls suggests underpriced jobs.
• Rising late fees and NSF events in months with strong deposits, which means the money is gone before it arrives.
• Liens or joint check arrangements mentioned in payee lines, which show suppliers no longer trust payment.
• Large deposits from the owner just before payroll, month after month.

None of these alone is a reason to decline, but together they describe a business in trouble. They are also among the issues that end applications in other industries, as listed in business loan denial reasons found in bank statements. A contractor who knows which patterns lenders read can fix the habits behind them well before applying.