Lines of Credit for Construction Companies: Managing Project Cash Flow

If you could only have one financing tool as a construction company, a business line of credit should be your choice. Lines of credit match the fundamental rhythm of construction work: you spend money to start projects, then collect after work is complete and approved.

Unlike term loans with fixed payments regardless of need, a line of credit lets you draw funds when projects require capital and pay down when payments arrive. You only pay interest on what you use.

Why Lines of Credit Are Essential for Contractors

The construction business model creates predictable cash flow challenges that lines of credit directly address:

• Mobilization costs — Equipment delivery, material purchases, and crew setup before you can bill.
• Progress billing gaps — Work is approved on the 15th, billed on the 30th, collected 30-45 days later.
• Retainage timing — 5-10% held until completion ties up significant cash on larger projects.
• Payroll consistency — Your crew gets paid every Friday regardless of when customers pay you.
• Material supplier terms — Often net 30, sometimes requiring COD for new relationships.
• Seasonal variability — Cash reserves for slow seasons without fixed loan payments.

How Construction Lines of Credit Work

A business line of credit for construction operates like a sophisticated checking overdraft:

• Credit limit — The maximum you can draw, typically $50,000 to $1,000,000+ for established contractors.
• Draw mechanism — Write checks, ACH transfer, or wire funds from the line as needed.
• Interest calculation — Daily interest on outstanding balance, typically billed monthly.
• Repayment flexibility — Pay down any amount any time. Required minimum is usually interest-only.
• Revolving nature — As you pay down, availability replenishes for future draws.
• Annual review — Most lines renew annually, with the lender reviewing updated financials.

Typical Terms and Structures

Line of credit terms vary by lender type and borrower strength:

Sizing Your Line of Credit

The right line size depends on your working capital cycle. Here is how to calculate:

• Average monthly expenses — Total your typical monthly cash needs (payroll, materials, overhead).
• Collection cycle — How long between performing work and collecting payment? Usually 45-90 days in construction.
• Working capital gap — Months of expenses x number of months in cycle = base need.
• Add buffer — Delays happen. Build in 20-30% cushion.
• Factor growth — If you are taking on larger projects, size for where you are going.

Example calculation:

• Monthly cash needs: $180,000
• Average collection cycle: 60 days (2 months)
• Base working capital need: $360,000
• With 25% buffer: $450,000
• Recommended line size: $400,000-$500,000

Qualifying for Construction Lines of Credit

Lenders evaluate construction companies carefully due to industry volatility. Key factors:

• Time in business — Most traditional lenders want 2+ years. Online lenders may work with 1+ year.
• Annual revenue — Lines are often sized as a percentage of revenue (10-25% typical).
• Profitability — Consistent profit margins demonstrate operational competence.
• Personal credit — Owner credit score matters, especially for smaller companies.
• Backlog quality — Contracted work reduces lender risk perception.
• Accounts receivable quality — Strong aging with collectible receivables.
• Existing debt load — Room in your cash flow for the interest payments.

Collateral and Guarantees

Most construction lines of credit require security:

• Accounts receivable — Progress billings and retainage become collateral. Most common.
• Equipment — Heavy equipment equity provides additional security.
• Real estate — If you own your yard or building, significant collateral value.
• Personal guarantee — Owner guarantee is almost always required for small/mid-size contractors.
• UCC filing — Lender files a blanket lien on business assets.

Unsecured lines exist but typically come with lower limits, higher rates, and stricter qualification requirements. For most contractors, offering collateral unlocks better terms.

Real-World Example: Project Cash Flow Management

The situation: A commercial drywall contractor in Denver generates $3.2M annually. Projects range from $50,000 to $400,000. They were managing cash flow through careful scheduling but facing constraints on which projects they could pursue.

The financing: $400,000 revolving line of credit from a regional bank. Rate: Prime + 1.5% (approximately 9%). Secured by accounts receivable and equipment. 0.25% annual fee on unused portion.

How they use it: Typical draw of $150,000-$250,000 during project mobilization phases. Pay down as progress payments arrive. Average outstanding balance: $180,000.

The impact: Able to bid on multiple projects simultaneously without cash flow constraints. Won two additional projects in year one that generated $140,000 in gross profit. Line interest cost: approximately $16,000 annually.

Net benefit: $124,000 in additional profit, plus reduced stress and improved bonding capacity from stronger working capital position.

Line of Credit Best Practices

How to maximize the value of your construction line of credit:

• Draw purposefully — Match draws to specific needs. Do not draw just because you can.
• Pay down aggressively — When cash arrives, pay down the line. Interest savings add up.
• Track by project — Know which projects are drawing from the line and when they will generate cash.
• Monitor your usage — If you are consistently at 80%+ utilization, you may need a larger facility.
• Keep lender updated — Share good news (won contracts, completed projects) proactively.
• Prepare for renewal — Have updated financials ready before your annual review.

Covenants and Requirements

Bank lines of credit typically include covenants — financial ratios you must maintain:

• Debt service coverage — Usually 1.15x to 1.25x minimum.
• Current ratio — Current assets divided by current liabilities, often 1.25x minimum.
• Tangible net worth — Minimum net worth requirement.
• Borrowing base — Line availability tied to eligible receivables (often 80% of under-90-day invoices).
• Reporting requirements — Monthly or quarterly financials, annual reviews.

When Lines of Credit Are Not Enough

Lines of credit solve working capital timing but have limitations:

• Large equipment purchases — Equipment financing often has better terms for major purchases.
• Real estate acquisition — Separate commercial mortgage or SBA 504 makes more sense.
• Extended working capital needs — If you need funds for years, a term loan may be cheaper.
• Bonding support — Lines improve working capital ratios but some bonding companies want to see term debt capacity too.

Most established contractors maintain both a line of credit for working capital flexibility and separate facilities for equipment or real estate. The combination provides comprehensive coverage.

Getting Started

To pursue a construction line of credit:

• Calculate your need — Use the sizing formula above to determine appropriate limit.
• Gather documentation — Bank statements, tax returns, financials, backlog report.
• Assess your collateral — What receivables and equipment can you offer as security?
• Compare lenders — Bank rates are lower, online is faster. What matters most for your situation?
• Start conversations early — Begin the process before you desperately need the funds.

A properly sized line of credit transforms construction cash flow management. Instead of juggling projects and timing, you focus on winning and completing profitable work while the line handles the timing gaps.

Liminal can help you compare line of credit options from multiple lenders. Our marketplace is free, takes about 2 minutes, and shows you offers without impacting your credit score.