Retention money — an asset you cannot spend
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.
Bank guarantees — usually the thing you actually need
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:
- The margin. Banks typically require a cash margin or a lien on a fixed deposit — a proportion of the guarantee value locked up for its duration. This is the real cost, because that money cannot work elsewhere.
- The facility limit. Get a revolving BG limit sanctioned rather than negotiating each guarantee separately. Tender deadlines do not wait for credit committees.
- Expiry management. Guarantees that have served their purpose should be returned and cancelled so the margin is released. Contractors routinely leave lakhs tied up in guarantees on projects finished two years ago.
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.
How work orders are read
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.
What fits, and what does not
| 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.
Questions this page gets asked
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.
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.
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.
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.
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.
Get the guarantee limit and the working capital together
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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All rates, fees and eligibility figures on this page are indicative market ranges for illustration and are not an offer. Approval, pricing and the sanctioned amount rest entirely with the bank or NBFC. Money Bharti is a loan marketplace, not a lender. Assess your repayment capacity honestly and read the sanction letter in full before signing. This content is general information, not financial advice.