Ninety to a hundred and eighty days to be paid, and a slice held back for years after that. The instrument a contractor usually needs most is not a loan at all — it is a bank guarantee facility.
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The longest cash cycle of any trade, and a slice of every bill held back for years after completion. The instrument a contractor most often needs is not a loan at all — it is a bank guarantee facility, and knowing that changes what you should be asking for.
Most construction and works contracts hold back 5% to 10% of each certified bill until the defect liability period ends, often a year or two after completion. It appears on your balance sheet as a receivable, and for financing purposes it is close to worthless — lenders discount it heavily or exclude it, because they cannot rely on when or whether it releases.
The practical consequence: a contractor's usable working capital is materially smaller than the balance sheet suggests. A firm showing ₹1.2 crore of receivables might have ₹25 lakh of that locked in retention across finished projects. Sizing a limit off the headline figure produces a shortfall in the middle of a job.
Where the contract permits it, releasing retention against a bank guarantee instead of cash is worth negotiating at the contract stage. It converts dead money into working capital for the cost of the guarantee commission.
Contractors need guarantees constantly: earnest money deposits to bid, performance guarantees on award, mobilisation advance guarantees, retention release guarantees. Without a BG facility you cannot bid for work at all, which makes it more fundamental than any term loan.
A guarantee is not money lent to you. The bank undertakes to pay your client if you default, and charges a commission for standing behind you. What matters practically:
Audit your live guarantees once a year
Every expired-but-uncancelled guarantee is margin money sitting idle and limit you cannot use for the next tender. Ask your bank for a list of outstanding BGs, match it against completed projects, and chase clients for the originals so they can be cancelled. It is unglamorous and it frequently frees up more working capital than a new facility would.
Your order book is the forward-looking part of the file, and it is read carefully.
Client quality matters most. Government and PSU work orders are slow to pay but very unlikely to disappear. Private developer work pays faster on paper and carries real counterparty risk. A mix reads better than either extreme.
Concentration is examined. One client representing most of your order book is a risk the lender will price, exactly as it would in trading.
Execution capacity. An order book far larger than your demonstrated annual turnover raises a question about whether you can deliver it, and over-committing is a common way contracting firms fail.
| Need | Fits |
|---|---|
| Bidding and performance security | Bank guarantee facility |
| Running a project between bills | Overdraft or cash credit |
| Certified bills awaiting payment | Bill discounting |
| Equipment purchase | Equipment finance |
| Mobilisation before work starts | Mobilisation advance from the client, against a BG |
What rarely fits is a plain term loan for working capital. The cycle is too long and too lumpy for a fixed EMI, and a project delay — which is normal in this trade — turns a manageable gap into a missed instalment.
Q1. What is retention money and why does it hurt?
It is 5% to 10% of each bill held back by the client until the defect liability period ends. It sits on your books as a receivable you cannot use, and lenders discount it heavily, so your assessed working capital is smaller than your balance sheet suggests.
Q2. Is a bank guarantee a loan?
No. The bank undertakes to pay your client if you fail to perform, and charges a commission. It usually requires a cash margin or a lien on a fixed deposit, which is the real cost to you.
Q3. Can I borrow against work orders?
Order-backed limits exist, though lenders prefer certified bills to unbilled orders. A strong order book from government or well-rated clients supports a larger working capital limit even where it is not directly financed.
Q4. Can retention be released early?
Often yes, against a bank guarantee, if the contract allows it. That trades a commission for the use of money that would otherwise sit idle for a year or more — usually a good trade.
Q5. Do government contracts help my application?
Generally yes. Payment is slow but counterparty risk is very low, and lenders weigh certainty highly. The slow payment is exactly what bill discounting and a working capital limit are for.
Money Bharti compares BG facilities, overdrafts and bill discounting across RBI-registered banks and NBFCs against your order book and retention position. Soft enquiry only.
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