Contractor reviewing cash flow reports with a commercial lender to evaluate financing readiness and working capital.

Common Pitfalls Contractors Make When Seeking Bank Financing Part III

Commercial Credit

August 07, 2026•11 min read

By John Kraus, Premier Credit Insights & Solutions LLC

Introduction

In Part I, we discussed why gross profit margins matter.

In Part II, we explained why strong financial reporting gives lenders confidence.

But even profitable contractors with strong financial statements can encounter financing problems.

Why?

Because profits don't make loan payments. Cash does.

If Part I answers "Are you making money?" and Part II answers "Can I trust your numbers?", then Part III answers the question every commercial lender ultimately asks:

"Will this business generate enough cash to repay the loan?"

One of the most common misconceptions I encountered throughout my banking career was the belief that a profitable income statement automatically meant a business had sufficient cash flow to support additional borrowing.

Unfortunately, that is often not the case.

In fact, I have seen profitable contractors experience cash shortages that delayed payroll, strained supplier relationships, or forced them to postpone equipment purchases—not because they lacked profits, but because those profits had not yet been converted into cash.

Understanding the difference between profitability and cash flow is one of the most important concepts in commercial lending. In this article, we'll examine several common reasons profitable contractors become cash constrained—and why lenders look far beyond the bottom line when evaluating a financing request.

1. Profit Is an Accounting Measure

Profit and cash flow are closely related, but they are not the same.

Under Generally Accepted Accounting Principles (GAAP), profit is an accounting measure that reflects revenues earned less expenses incurred during a given period. Cash flow, on the other hand, measures the actual movement of money into and out of the business.

A company can report healthy profits while having very little cash available to operate.

That is why experienced commercial lenders look well beyond the income statement. They analyze where cash is being generated, where it is being consumed, and whether sufficient cash will be available to support day-to-day operations and repay existing and proposed debt.

Simply put, lenders are not asking only, "Is the business profitable?"

They are asking, "When will those profits become cash?"

Under GAAP accounting, revenues and expenses are recognized as they are earned and incurred, not necessarily when cash changes hands. The balance sheet complements the income statement by showing where the company's capital has been invested, what assets have been accumulated, and what liabilities remain outstanding. Together, these financial statements provide lenders with a comprehensive snapshot of the contractor's financial condition.

As I've emphasized throughout this series, commercial contractors often benefit from having their financial statements prepared using the percentage-of-completion method. This approach provides lenders with a more meaningful picture of project performance, profitability, and the financial position of the business while work is still in progress.

Using this information, lenders evaluate not only where profits are being generated, but also where cash is being consumed. Is working capital tied up in accounts receivable, retainage, inventory, or work-in-process? Are growing projects requiring additional cash before customer payments are received? Has cash been invested in equipment or distributed to owners?

These are the questions lenders ask because they reveal whether a profitable contractor is also generating sufficient cash flow to support operations and repay debt.

Contractors routinely experience timing gaps between when costs are incurred and when cash is collected from customers. When those gaps are predictable, well-managed, and supported by sound financial reporting, they often become appropriate candidates for bank financing. Working capital lines of credit exist largely to bridge these temporary cash flow gaps—not to finance operating losses.

Takeaway: Banks lend against future cash flow—not accounting profits.

2. Growing Contractors Often Become Cash Poor

Every successful contractor wants to grow. Growth leads to higher revenues. Higher revenues should produce greater profits.

But growth also requires capital.

Winning larger projects and taking on additional work often means funding significant costs long before customer payments are received. Those costs may include:

Payroll
Materials
Subcontractors
Insurance
Mobilization costs
Retainage

All of these require cash.

The faster a contractor grows, the more working capital is needed to support that growth. In many cases, the cash generated from operations simply cannot keep pace with the increasing investment required to finance larger projects and expanding operations.

This is one of the great paradoxes of business.

A company can be growing, profitable, and winning more work than ever before—yet still experience cash shortages.

In fact, rapid growth is often one of the largest consumers of cash in a contractor's business.

Fortunately, this is also where commercial banks can provide tremendous value. When growth is supported by healthy profit margins, disciplined financial management, adequate working capital, and realistic cash flow projections, banks become trusted financial partners by providing the working capital needed to bridge temporary funding gaps and support continued expansion.

The objective is not simply to grow. It is to grow profitably, manage cash flow effectively, and maintain the financial strength necessary to support that growth over the long term.

Unfortunately, not every growth story has a happy ending. Even well-managed contractors can encounter unexpected events that quickly transform strong profits into severe cash flow pressure. Later in this article, I'll share one of the most memorable experiences from my banking career—one that demonstrates how rapidly a profitable contractor's financial position can change.

3. Accounts Receivable Can Hide Cash Flow Problems

Accounts receivable is often one of the largest assets on a contractor's balance sheet. But unlike cash, receivables cannot be used to meet payroll or pay suppliers until they are collected.

When accounts receivable grows faster than revenues, cash flow pressures often follow.

This can occur for several reasons. Customers may delay payments. Change orders may become disputed. Contractors may take on additional projects that increase retainage balances. While revenues continue to be recognized, the cash needed to support daily operations has yet to arrive.

Meanwhile, the contractor's obligations continue.

Subcontractors expect to be paid. Payroll must be met. Material suppliers require payment. Quarterly payroll and income tax obligations come due. Loan and lease payments continue regardless of whether customers have paid their invoices.

This is one reason lenders place significant emphasis on accounts receivable aging schedules. They are evaluating far more than the total receivable balance.

Questions lenders often ask include:

How much is over 90 days past due?
Are receivables continuing to turn over at a reasonable pace?
How much is tied up in retainage?
Are collections concentrated among only a few customers? Are collections overly concentrated among one or two major customers?
- Throughout my career, I encountered contractors whose dependence on a handful of accounts created significant credit risk. Losing one major customer could materially affect the entire business – ultimately that could make or break the company.
Are there disputed invoices or collection issues that could delay cash receipts?

Healthy receivables produce healthy cash flow.

Well-managed billing practices, prompt collections, and disciplined monitoring of outstanding invoices help contractors maintain the cash conversion cycle necessary to support continued growth. Simply put, the sooner profits are converted into cash, the stronger the company's financial position becomes.

Receivables are not cash—they are expected future cash. The more effectively contractors bill, monitor, and collect those receivables, the faster profits are converted into working capital that supports growth. For lenders, the quality of a contractor's receivables is often just as important as the amount reported on the balance sheet.

Inventory and work-in-process also tie up valuable cash before eventually being converted into accounts receivable—and, finally, collected cash. This is why experienced lenders evaluate the entire cash conversion cycle, not just individual balance sheet accounts. Contractors who "Think Like the Bank®" should be doing exactly the same thing, because managing the entire operating cycle is fundamental to maintaining healthy cash flow.

4. Equipment Purchases Consume Cash

Most contracting businesses require significant investment in equipment—trucks, excavators, trailers, technology, specialized tools, and other machinery essential to daily operations. Whether purchasing equipment to support growth or replacing aging assets, these decisions require careful planning.

Management must determine the most appropriate source of funding. Should the equipment be purchased with available cash, preserving borrowing capacity but reducing liquidity? Or should it be financed through a loan or lease, preserving cash for working capital but creating additional debt service obligations?

Neither approach is inherently right or wrong. The appropriate decision depends upon the company's liquidity, leverage, projected cash flow, tax considerations, and future capital needs.

Experienced lenders recognize that equipment often generates the revenue needed to support its financing. However, they also evaluate whether the contractor will retain sufficient working capital after the purchase to fund payroll, materials, subcontractors, and other operating needs.

5. Owner Distributions Matter

Business owners are entitled to be compensated for the risks they assume and the value they create. In addition to salaries, many owners receive distributions from company earnings. For S corporations, these distributions are often necessary to fund the owners' personal income tax obligations on business profits.

The issue is not whether distributions occur. The issue is whether they are appropriately balanced with the company's ongoing need for working capital and liquidity.

When distributions become excessive, they reduce cash reserves, weaken the balance sheet, and may ultimately create financing needs that otherwise would not have existed. Profitable businesses can quickly become cash constrained when too much capital is withdrawn before the company has sufficient resources to support its operations and future growth.

Owners also have personal financial obligations, investment goals, and lifestyle considerations. That is one reason lenders frequently perform a global cash flow analysis, evaluating not only the contracting business but also the financial position, cash flow, and debt obligations of the owners and their affiliated entities. A strong business supported by financially responsible ownership provides lenders with greater confidence.

Successful contractors recognize that managing personal finances and managing business finances are closely connected. Decisions made in one often affect the other.

Takeaway: Profits retained strengthen businesses. Excessive distributions weaken liquidity.

Banker's Tale

Early in my banking career, I worked with an HVAC contractor that wanted to expand beyond its traditional private-sector work by pursuing larger contracts with local school districts.

The company had successfully bid on two major school projects that would have more than doubled its annual revenues. To support the work, it requested a substantial increase in its working capital line of credit. Both projects were scheduled to be performed during the summer months, when the schools were vacant, requiring the contractor to mobilize significant labor, materials, equipment, and subcontractors simultaneously. The company also maintained a healthy backlog of municipal projects in addition to its ongoing private-sector work.

On the surface, the opportunity was exciting. A closer look, however, told a different story.

The contractor had demonstrated steady revenue growth but only modest profit margins. The newly awarded school projects had been competitively bid at even lower margins, leaving little room for error. More importantly, the rapid expansion would have required a substantial investment in working capital. Accounts receivable and retainage balances were expected to increase dramatically, while payroll, supplier payments, and other operating costs would need to be funded long before customer payments were received.

From a lending perspective, the question was not whether the company could perform the work. The question was whether it had sufficient financial resources to withstand the unexpected.

After extensive discussions, we were unable to structure financing that both the contractor and the bank found acceptable. The company ultimately obtained financing elsewhere.

Although I cannot speak to every factor that followed, I later learned that the outcome was not favorable and the company was ultimately unable to complete the expansion successfully.

That experience left a lasting impression on me.

The opportunity itself was not necessarily the problem. The concern was that the company had very little margin for error. Everything had to go right.

One unexpected cost overrun, delayed collection, labor issue, or project dispute could have significantly disrupted the company's cash flow.

Experienced commercial lenders understand that construction projects rarely proceed exactly according to plan.

That is why banks evaluate not only whether a contractor can complete a project—but whether it has sufficient financial capacity to withstand the unexpected.

One of the lessons I carried throughout my banking career is that successful growth requires more than winning larger contracts. It requires sufficient capital, realistic financial planning, and adequate liquidity to navigate the unexpected.

Contractors often say, "You're only one bad job away from going under."

After witnessing situations like this firsthand, I came to understand just how much truth there is in that statement.

Banker's Takeaway

The strongest contractors understand that profitability and cash flow are related—but they are not the same.

Lenders know the difference. Successful contractors know the difference too. The strongest contractors understand this—and successful lenders expect them to. They consistently achieve healthy profit margins, manage cash flow effectively, and use bank financing strategically—not to fund losses, but to bridge temporary cash flow gaps, capitalize on growth opportunities, and strengthen their business over the long term.

Revenue attracts attention. Profit creates confidence. Cash flow repays loans.