The larger a project that you're performing for a customer, the greater the chance that the customer is borrowing the money for the building. Banks and other finance companies are willing to do this, but some of them—increasingly more of them—want assurances and agreements from you that make it more likely that they will get their loan repaid. Often, their comfort comes at the expense of your ability to get paid.
Fundamental to all issues with banks is an understanding that the bank's highest goal is to protect itself. That's more important to the bank than getting the job done as quickly and efficiently as possible.
You can expect the bank's agreement with the customer to allow the bank to stop paying anytime it feels "insecure."
Therefore, you can expect the bank's agreement with the customer to allow the bank to stop paying anytime it feels "insecure." It may require the customer to come up with more cash on short notice, or to allow the bank to apply "contingency" funds (which the customer and contractor may have planned to use to pay for work items) to an interest reserve to protect the bank.
Since without funding, there will be no construction, customers and their contractors have to find ways to deal with these issues.
For example, lenders generally want to know that the amount of money they are lending is enough to get the job done. They do not want to end up with a half-finished project, after their customer has skipped town, leaving them with the extra cost of finishing the work just to be able to sell the property.
Accordingly, it is not unusual for a bank to ask the contractor to assure it that the amount of the contract is sufficient to complete the work. Contractors have to be careful about what representations they make to lenders. If it later turns out that an essential item was left out of your contract, or an unanticipated problem surfaces, a bank could use that as an excuse to stop funding the project or, even worse, to blame you for misrepresenting the facts to the bank.
Another area where banks get involved is over lien waivers. They often ask a title company to certify monthly that the percent of work for which the bank has advanced money is now "free and clear" of liens, giving the bank priority over later claims. In order to make such a certification, the title company will typically ask all contractors and subs to sign strict lien waivers to get paid monthly draws.
Many of the forms I have seen require the subcontractors to waive their right to file liens for retainage not yet paid, or for "extras," which haven't been paid yet either. In a fight with a bank over loan disbursements, even if you win, you could find payment delayed for a long time.
A third issue that often comes up is the bank's desire to get you to agree to finish the work even if your customer breaches his contract. Normally, the bank has no right to step in and enforce the contract against you, since it wasn't one of the parties to the contract.
To get around this, banks frequently ask contractors to sign a "Contractor's Consent to Assignment" of their contracts to the bank. In these consents, the bank will often require the contractor to agree to keep working while the bank figures out whether it really wants the project finished.
Typically, these consents say nothing about getting the contractor paid for past work (the bank views this as the contractor's problem), or even about paying the contractor to stick around for the bank's convenience. As you know, it is not easy to get your suppliers to deliver materials to finish a project if they haven't been paid for materials previously delivered.
Banks typically get very nervous about change orders and extras, and will put clauses in their contractor consent forms that require all changes to be approved by the bank in order to be official. Needless to say, it can be totally unworkable in the field to have to get a bank officer to come out and approve a change on short notice.
One way that this can be resolved is to get the bank to agree that only changes over a certain amount (say, $1,000 or $5,000), or when the cumulative total exceeds a larger amount, will need to be approved by the bank.
If the contractor doesn't remember to do this, he may find that he has no way to get paid for the extra.
Be prepared for the bank to have very specific requirements for stored materials too. If the bank is advancing the money to buy them, it wants to make sure that they are stored appropriately (typically in a bonded warehouse), adequately insured, separately identified and that the bank has filed its own security agreement and UCC forms. Many of these requirements add to the cost of the work and should be taken into account in pricing the work to the customer.
A major source of friction on bank-financed work is over the payment process. The bank may demand paperwork the contractor didn't know he had to fill out. The lender may also insist that its own inspector come out and verify percentage of completion.
The bank may insist on lien waivers from your own subs and suppliers, on forms that they aren't willing to sign, and the bank officers may not have the same sense of urgency in getting your paperwork processed that you do. All of this can really bog down and stretch out the time it takes to be paid.
The best way for a contractor to protect itself from unreasonable demands by bankers is by asking the customer about where the funds are coming from right up front. If a bank will be involved, get the customer's permission to call the bank and find out what requirements the bank is going to impose. Get a copy of the lien waiver form and any other document that could affect you.
In most cases, bank requirements that would really affect your work adversely can be worked out once you explain to the bank the problem it is creating (the contractor was the last person the bank's lawyer was thinking about when drafting these things).
If you can't get acceptable terms, the time to think about walking away is before you have a lot invested in the job, not after you have unpaid bills to worry about.