Construction Line of Credit: When It Helps Contractors

Why construction needs flexible credit

Costs come first and payment comes later. A line lets you cover the gap project by project.

You buy lumber and pay crews each week, while the draw or pay application may take 30 to 90 days to clear. Retainage adds more delay. A revolving line fills that gap and refills when you repay. See construction accounting for how timing shows up in your books.

Common uses

Contractors draw for materials, subcontractor payments, payroll, permits, insurance and short equipment needs.

• Materials for the next phase before the draw clears
• Payroll in the weeks between billing and payment
• Bid, permit and bonding costs
• Short-term equipment rental

For longer-lived equipment, equipment financing may match better.

Example: costing a draw

A short draw against a profitable job costs little compared with the job's profit. Work out the numbers before you draw.

This is an illustrative example. You draw $30,000 for materials and payroll on a job that pays in 60 days. If interest and fees total about $1,200, and the job nets $9,000, the cost is a small share of the gain. If the job nets $800, borrowing makes no sense. Learn how charges accrue in how interest works on a line.

What to expect when you apply

Funders look at time in business, monthly revenue, credit and bank statements. ROI Funder considers 500+ FICO, 6+ months in business and $20,000+ monthly revenue.

A complete file is the application plus three months of business bank statements. Approved, complete files can see funds the same business day, and lines of credit typically fund in 24 to 72 hours. Applying uses a soft credit pull with no obligation to accept an offer. See the line of credit page.

Managing a draw schedule

Match draws to specific job costs, and repay when the job pays. Do not let one project's balance linger across jobs.

Keep a simple tracker: job name, amount drawn, expected payment date, and balance. When a customer pays, repay immediately. This keeps interest down and restores availability for the next job. Review the tracker weekly, and avoid using the line to cover overhead that no job will repay.

Seasonality and slow periods

Weather, permitting and inspection delays can freeze billing. Keep room on the line for the unexpected.

Winter slowdowns, rain delays and inspection backlogs all push payment dates out. Avoid drawing the line to its limit during good months. Keep a portion unused as a buffer. Compare the cost of carrying a balance against the cost of delaying a project, and let the numbers guide the choice.

Comparing a line with other contractor funding

Lines suit repeat, short gaps. Term loans suit one-time purchases. Equipment financing suits machines.

If you buy materials every week, a line fits. If you are buying an excavator, equipment financing spreads the cost over the asset's life. If you need a single lump for a yard expansion, a term loan may be cleaner. Match the product to the need and compare total cost for each.

Before you apply, gather your last three months of business bank statements and a list of active jobs with expected payment dates. Showing how each draw will be repaid helps you borrow only what the work can support.

Restrictions you should know about

Many funders restrict residential remodeling and new residential construction. Commercial and specialty trades often have more options.

Be clear about your project mix when you apply. Funding is not promised, and terms vary. Read construction factoring for a look at an invoice-based alternative, and our guide to managing a line of credit to keep your balance under control.