I spent years as a CPA watching good contractors lose money they had already earned. Not on bad bids or slow crews — on capital. They would win the work, do the work, and then hand a slice of the profit to whoever fronted the cash to get from “invoice sent” to “invoice paid.” Usually they had no idea how big that slice was.

Here is the thing nobody puts in plain terms: every dollar you bring into the business has a price, and the prices are wildly different. A dollar from a customer deposit costs you nothing. A dollar from a merchant cash advance can cost you fifty cents. Same dollar, same job, radically different outcome — and the difference is pure margin.

Here is the whole range at a glance, cheapest to most expensive — then the breakdown of what each one really costs and when it makes sense.

What is the cost of capital, really?

Cost of capital is what you pay to use money that isn’t yet yours — expressed as an annual percentage so you can compare options that look nothing alike.

That last part is where most contractors get tripped up. A bank quotes an interest rate. A factor quotes a percentage per 30 days. A merchant cash advance quotes a “factor rate” of 1.3. An investor quotes a percentage of ownership. These are not the same units, and the people selling the expensive ones count on you not converting them to a common number.

So we convert everything to one number: effective annual cost. What does this dollar cost me, per year, to use? Once everything is in the same units, the picture gets uncomfortable — and clarifying. The ladder above shows where every option lands; the sections that follow explain why, and how to choose between them.

Why is some capital nearly free?

The cheapest capital in construction isn’t financing at all. It’s your customer’s money, working before yours has to.

A mobilization payment or deposit written into the contract means the owner or GC funds the start of the job. You buy materials and make payroll with their cash, not a lender’s. The cost is zero. The only thing standing between you and this dollar is whether you asked for it in the contract.

The second-cheapest source is one most contractors walk past: taking your supplier’s early-pay discount. When a supplier offers 2/10 net 30, paying on day 10 instead of day 30 earns you a 2% discount for putting up the cash 20 days early. Annualize that and it’s about a 36% return — guaranteed, risk-free, every time you do it. There is almost no other place in your business where idle cash earns 36%. If you have the money, taking that discount beats parking it anywhere else.

The same discount, flipped: how you can become the expensive lender

Here is the nuance that separates operators who keep their margin from those who quietly bleed it.

When your supplier offers 2/10 net 30, taking it earns ~36%. But when you offer it to your customer to get paid faster, you are on the paying side — financing your customer at roughly 36% annualized. You gave up 2% to get paid 20 days early, and 2% over 20 days is a 36% annual rate.

That isn’t always a bad deal. If getting paid 20 days sooner lets you take a supplier discount, make payroll without borrowing, or win the next bid, ~36% can be worth it. But you should know you’re paying it. And the longer your net terms, the cheaper offering the discount becomes — the same 2% over a net-60 cycle costs closer to 15%. Same instrument, very different price depending on which side of it you sit and how long the terms run.

Where does borrowed money fit?

Between the free end and the dangerous end sits the broad middle: actual debt. Ordered cheapest to most expensive, here is how to think about each.

SBA 504 is the cheapest borrowing a contractor can usually get — fixed-rate, government-backed, built for real estate and major equipment. In 2026 it runs roughly 6.5–7.5%. The catch is speed: it’s slow to close and tied to specific assets. Use it for the yard, the building, or the big iron you’ll own for years.

Conventional bank term loans (7–10% for strong borrowers) and equipment financing (6–14% for qualified contractors, because the iron secures the loan) cover most planned investments. The discipline that matters: match the loan term to the life of what you’re buying. Financing a five-year machine over seven years means paying for it after it’s stopped earning.

A business line of credit (8–13%) is the single most useful tool for the cash-flow gaps that define construction — the wait between doing the work and getting paid. You draw only what you need and pay only for what you draw. The one rule: set it up before you need it. Lenders fund relationships, not emergencies, and the day you’re desperate is the worst day to apply.

SBA 7(a) (9–11.5%) is the flexible-use, government-backed option when a bank declines you. It carries fees and a 45–75 day close, but when the alternative is an online lender at three times the rate, the math is easy. If a bank says no, start here before you touch anything above 18%.

What about factoring — isn’t 2% cheap?

Construction invoice factoring is where the headline number does the most damage. “Just 2%” sounds trivial. It isn’t.

Factoring means selling an approved invoice for 70–85% of its value now, and getting the rest — minus a fee of 2–4% per 30 days — when your GC pays. The approval rides on your GC’s creditworthiness, not yours, which is genuinely useful for a newer sub with a strong GC. In the typical case, where the GC pays in 45–60 days, that works out to roughly 24% annualized. If the GC drags to 90 days, it climbs past 50%.

That retainage exclusion is structural, and it’s specific to construction. A factor will advance on the 90–95% that’s already due and leave the withheld portion untouched until the project closes, which can be a year out. If retainage is your real cash-flow problem, factoring is the wrong tool.

What makes merchant cash advances so expensive?

A merchant cash advance is the most expensive money most contractors will ever be offered, and it’s engineered to not look that way.

An MCA gives you a lump sum in exchange for a slice of your future revenue, repaid through daily withdrawals from your account. It’s quoted as a “factor rate” — 1.1 to 1.5 — never as an APR, because the APR would stop most people from signing. Convert it, and the effective cost routinely lands between 40% and 350%, sometimes higher. Because it’s legally a purchase of receivables rather than a loan, it sidesteps the disclosure rules that would otherwise force the real number onto the page.

Two things make it uniquely punishing for a contractor. First, the daily draws hit your account before you’ve covered payroll, so a slow week doesn’t pause the repayment. Second, there’s no discount for paying early — the cost is fixed the moment you sign. If you’re being offered an MCA, talk to a lender about a line of credit or an SBA loan first. Most contractors who believe an MCA is their only option actually qualify for something far cheaper.

Why is equity the most expensive capital of all?

This is the one that surprises people, because equity has no interest rate and no monthly payment. That’s exactly why it’s dangerous to misjudge.

When you bring on an outside investor, you don’t pay them back over a term. You sell them a permanent share of every dollar the business earns from that day forward. There’s no final payment, no payoff date, no point where the cost ends. For a healthy small contractor, the implied annual cost of equity lands around 25–40% — but the number understates it, because unlike every loan above it, it never stops. A term loan’s cost has an end. Equity’s doesn’t.

That doesn’t make equity wrong. For growth you genuinely can’t debt-finance — a step-change in size, a capability you can’t build with borrowed money — it can be the right call. But it belongs at the bottom of the list, used only after the cheaper rows are exhausted, not reached for first because it feels painless in the moment.

How do I actually choose?

The decision comes down to three questions, and they line up with the three things that drive cost: what the money is for, how fast you need it, and whether you can tie it to a specific invoice or contract.

Capital you can tie to an asset or an approved invoice is cheap, because the lender has something concrete behind the loan. Capital for a general gap, needed fast, with nothing specific to pledge, is expensive — that’s the exact corner where MCAs get sold. The further ahead you plan, the cheaper your options get, every time.

Work those three questions in order before your next financing call. They won’t replace the conversation with your lender, but they’ll tell you which end of the scale you should be aiming for — and keep you out of the expensive corner by default.

The one move that lowers your cost of capital across the board

Every rate above — the bank’s, the factor’s, even the MCA’s — is priced on how risky you look and how clearly you can show what you’ve earned. A contractor with clean, current books, accurate WIP, and pay applications that go out on time qualifies for cheaper capital than an identical contractor whose numbers are a quarter behind. Same business, lower price on money, purely because the financial picture is legible.

That’s the part you control. You can’t move the prime rate. You can move how bid-ready and fundable your firm looks — and that moves every rate you’ll ever be quoted.

Frequently asked questions

What is the cheapest source of capital for a contractor?

Customer deposits and mobilization payments are the cheapest, because they cost nothing — it’s your customer funding the job before you spend your own cash. The next cheapest is taking a supplier’s early-pay discount, which effectively earns about 36% annualized. Among borrowed money, SBA 504 financing (roughly 6.5–7.5% in 2026) is typically the lowest-cost option.

What is the most expensive way to fund a construction business?

Merchant cash advances are the most expensive debt, with effective annual rates routinely between 40% and 350%. Equity is arguably costlier still in the long run: it has no monthly payment, but it sells a permanent share of every future dollar the business earns, so its cost never ends.

Is invoice factoring a good deal for subcontractors?

It can be, for a clean, approved invoice from a creditworthy GC when you need cash quickly — it typically costs around 24% annualized and is approved on the GC’s credit rather than yours. The key limitation is that retainage cannot be factored, so it does nothing for the portion of your money withheld until project closeout.

How do I calculate the real cost of a merchant cash advance?

Multiply the advance by the factor rate to get total repayment (a $50,000 advance at 1.3 means repaying $65,000), then annualize that cost over the expected repayment period. Because MCAs are repaid through daily draws over a short term, the effective APR is far higher than the factor rate suggests — commonly 40–350%. Always ask for the estimated APR before signing.

Why does equity cost more than a loan if there’s no interest?

A loan has a fixed cost and an end date. Equity gives an investor a permanent claim on a share of all future profits, with no payoff point. For a healthy small contractor the implied annual cost is roughly 25–40%, and because it continues for the life of the business, the total cost typically exceeds that of debt used for the same purpose.

This article is for general educational purposes and is not financial, legal, or tax advice.