Construction Business Line of Credit: A Step-by-Step Guide

Business Expansion, Business Management

Jacques Famy Jr
Review By Todd Millman

How Can a Builder Line of Credit Reinforce your Construction Business?

The construction industry is on track to keep growing, and you want your business to grow with it. Unfortunately, things like high insurance rates, expensive equipment, advertising costs, and licensing requirements can hinder your construction company's growth. In such situations, a builder line of credit emerges as a promising financing solution. It can provide the necessary liquidity, allowing flexibility to manage cash flow fluctuations more efficiently.

Best uses of business line of credit:

  • Operational Bills and expenses
  • Supply Purchases
  • Support Payroll Expenses
  • Cash Flow shortages
  • Immediate purchase

What is the Essence of a Builders Line of Credit?

Cash flow is essential to purchase updated tools, pay employees, and respond to invoices on time. If you’re feeling stuck and not sure where to turn, you might consider applying for a  construction business loan, specifically, a line of credit. Many construction businesses find lines of credit appealing due to their potential to cover liabilities and meet operational needs such as invoice financing.

A construction business line of credit not only helps you manage cash flow deficits but also nurtures your business's growth.

Traditional bank loans from large financial institutions may come with inflexible lending criteria, making contractor lines challenging to obtain. Comparatively, alternative lenders, like our network of lending partners have comparatively eased eligibility requirements, granting an access to swift contractor lines of credit.

Applying for a line of credit is easier than you think. Plus, it typically includes the benefit of no prepayment penalties should you wish to clear your outstanding balance earlier than required. Let’s explore how lines of credit work and how they can benefit your construction business by unlocking up to 100% of the invoice value for your immediate use.

Working Principles of a Builders Line of Credit for Construction Businesses?

A business line of credit is one of the most flexible financing options for borrowing money for the construction business. This form of material financing allows contractors to effectively manage their transactions, thus bridging payment gaps and managing cash flow effectively. It's a popular choice amongst financial products aimed at construction businesses. A contractor line is a type of small business loan likened to a credit card, uniquely suited to address recurring cash flow issues and financing material purchases.

With a line of credit, you can borrow up to a certain amount, or "credit limit", and you only pay interest on the funds you actually use. This allows for a flexible borrowing limit, adjusting to your business's fluctuating needs. You can draw and repay funds as often as you need, provided your payments are punctual and don’t exceed the set borrowing limit.

For example: If you have secured a $100,000 line but only deploy $50,000, interest is charged only on the latter amount or the outstanding balance.

Contractor lines’ flexible payment solutions such as weekly, bi-weekly, or monthly payments facilitate smoother operational expenses and payroll management. Certain lenders even allow for interest-only payments.

Unlike traditional lenders like banks, many alternative online lenders allow early full balance payment, saving you from unnecessary interest expenses—a considerable advantage when considering financing products. Traditional lenders often penalize preemptive repayments, resulting in loss of potential interest income.

With the absence of repayment term limit and collateral requirement, lines of credit only necessitate a personal guarantee, making them an effective safety net against unexpected expenses or a potent resource to drive your business's success.

Qualifying for a Builders Line of Credit and its Requirements

Qualifications for lines of credit are less strict than other traditional business loans. Factors such as the amount of time you’ve been in business, business credit score, personal credit score, and your business’s annual revenue all contribute to your company’s ability to get approved for a line of credit.

The minimum qualifications for a Construction line of credit through Advancepoint are as follows:

  • At least 12 months in business
  • Personal credit history needs to be good, credit score above 600 required
  • Average of $200,000 annual revenue
  • Satisfactory debt to income ratio

Documents to fully qualify:

  • Bank Statements
  • Tax Return NOT required under $150,000 credit limit in most cases

Additional documents will help back up your case. Requirements vary depending on the lender, but you may need to provide additional documents to fully qualify.

1. Contractors Credit Limit

Credit lines have a credit limit which is determined by a variety of factors including monthly and annual company revenue. With credit score, particularly personal FICO credit score, and firm's time in business also being keen determinants of the credit limit.

Most credit lines offered by banks or credit unions for machinery-intensive industries like construction, where equipment is the lifeline, range between $10,000 to $250,000, while non-bank lenders may offer credit lines of around $500,000 for a business with an annual revenue of $850,000 or more.

2. Contractors Credit History

Both your personal and business credit scores are considered. Personal credit history matters, especially when taking into account covenants such as the default clause. Your personal score and credit report takes precedent but lenders are also remarkably observant about your business score. They employ it as a barometer to check your company history, assessing elements like lien on assets and collateral requirements.

Traditional lenders will devote more attention to your business credit score more than alternative lenders, where company history matters significantly.
The higher your credit score is, the lower your interest rates will be. A personal credit score above 600 is required, and a score of at least 680 is optimal. But remember, late payments and defaults can adversely affect your credit score. So, manage your repayments carefully to avoid actions like the seizure of collateralized assets.

Business lines of credit require a guarantor to safeguard from default scenarios. Understanding profitability is also critical in handling interest rate fluctuations and its impact on your cash flow. Like any financial instrument, a builder line of credit has its advantages and disadvantages that need consideration before application. It's crucial to maintain creditworthiness through timely payments, ensuring the potential for better interest rates.

Requirements For Lines of Credit, tall crane lifting a bag of money

Unveiling the Necessity for Businesses in Construction to Obtain a Line of Credit

Before applying, it is important for your construction business to identify what it needs financing for. The construction industry is a crucial, but expensive industry.

Contractors often need working capital to grow their business. Let’s explore some of the main reasons construction businesses borrow capital and pursue a line of credit.

Many construction business owners use Lines of credit. The following are popular uses:

  • Paying bills (paying invoices)
  • New inventory and equipment
  • Managing cash flow and day to day expenses
  • Emergency expenses
  • Business Taxes
  • Licensing and permit requirements
  • And more!

1. Escalating Material & Construction Costs

Each year, inflation causes the price of materials and other goods to increase. Contractors have no control over the rising costs and must adapt in order to work with it.

Preplanning and anticipating rising costs will help your construction business prepare each year. Having capital on hand will also reduce the shock.

2. Aspirations to Diversify Your Business

Many construction businesses are ready to expand to multiple cities, a new home base location, or a larger service offering. Without a capital buffer, it can be intimidating to take the leap.

3. Onboarding Skilled Contractors

Quality contractors can make or break your construction business’s success. Consistency and growth are reliant on high-quality, skilled labor. The difference between a thriving construction enterprise and a struggling one can sometimes come down to the decision to hire a crew of experienced deckhands. This financial leap is often aided by resorting to contractor financing solutions — a financial strategy frequently used to manage the cost of onboarding skilled staff.

Hiring more skilled contractors as your construction business grows costs money that you may not have upfront. However, you need not feel overwhelmed with this aspect. Most banks offer both short-term and long-term financing loans, providing a flexible way to cover these expenses. Furthermore, these loans are designed to bridge the gap until payments contractors start coming in from completed projects.

But don't be weighed down by the burden of work if you do not have quality contractors on your team. The solution could lie in using a working capital loan to hire crew members until the new jobs start paying. As a word of caution, contractors ought to avoid the risk of exceeding their credit limit or missing payments, as these missteps could adversely affect their credit scores, thus impacting future compensation prospects.

4. Pending Invoices

Whether you are waiting on delayed invoices from clients or struggling to pay them yourself, it is a good idea to take a proactive stance on mitigating potential collection issues on pending Invoices.

Whether you are waiting on delayed invoices from clients or struggling to pay them yourself. This ratio plays a significant role in lender approval when seeking assistance from construction loan lenders. In the complex realms of financing, from invoices to contractor defaults, it's a good idea to take a proactive stance to mitigate potential collection issues. Always be sure to review any agreements carefully and ensure they've been approved by a reputable financing company.

Advantages of Implementing a Line of Credit to Amplify your Construction Business

The right business loans can benefit construction businesses and help their business grow. Construction lines of credit offer many perks to the construction businesses that choose to participate. The four main benefits are:

Why Prefer a Builders Line of Credit Over Other Loan Options?

1. Addressing Cash Flow Deficits

Cash flow is essential for construction businesses. Business loans offer the flexibility of having a cash safety net when money gets tight.

A construction line frees up your construction business’s ability to work on multiple projects or work orders at the same time preventing cash flow issues. You can also balance employment costs and construction supplies with credit when customer payments are delayed.

2. Fostering Business Growth

No construction business ever wants to remain stagnant. With the help of credit business loans, you can watch your business grow and adapt to the changing industry:

a. Hire More Employees

Good construction teams rely on high numbers of skilled contractors. To guarantee that your construction business has the best contractors around you will need to use time and money to train and build a quality team.

A Construction line helps buffer any singing bonuses, holiday bonuses, and benefits that you provide for your construction employees. Financial incentives often make incredible returns with happy employees.

b. Expand Marketing Efforts

If you want to expand your construction company, marketing and advertising efforts are essential. Whether you hire an in-house marketing team or outsource to a marketing agency, credit allows you to fund the initiative. You will quickly see your construction company’s reach expand when you invest in quality advertising.

c. Add New Locations

If you want your construction company to expand into multiple locations in your city or state, you need the cash buffer to do so. Adding multiple locations to your construction company is a long process that requires patience, and a line of credit can help make the process easier financially.

3. Having Ownership of Your Equipment

As your construction company grows, you will want to stop renting equipment and starting owning. At a certain point, owning your own materials is far more affordable in the long run.

Lines of credit offer financial buffers for purchasing construction equipment, but another option is equipment financing.

Equipment financing is a type of small business loan in which money is borrowed for the sole purpose of purchasing equipment. The equipment itself acts as collateral because it is an investment for the borrower.

4. Enjoy Freedom and Flexibility

Ultimately, the biggest benefit of a construction line of credit is the freedom and flexibility to use the construction line as needed. Whether you need the financing amounts for hiring more employees one month, or a few months later you require it for purchasing equipment, the decision remains entirely in your hands. This flexible structure removes the hassle typically associated with more structured forms of financing like term or SBA loans.

Since you can keep drawing funds as long as you make payments, there are no tight deadlines to worry about. Even as an emergency backup, you gain the confidence of knowing you have a flexible cash buffer.

Distinguishing Between Unsecured and Secured Construction Lines of Credit

There are two types of business line of credit for construction. Secured and unsecured, both acting as financing solutions tailored to your business needs. Lets delve into the unique features they each carry.

Unsecured Business Lines of Credit

Unsecured business financing embodies a line of credit option where the debt obligation does not demand collateral like property or others assets to ensure the promise of repayment—a debt to equity ratio equation can be used here to see how much a contractor owes compared to how much they own.

Secured Business Lines of Credit

Contrarily, a secured business line of credit strongly depends on the existence of collateral to guarantee the debt obligation. Here, collateral finds its form in various tangible assets such as real estate, equipment, or other tangible assets of the business. But not just them, even intangible assets like accounts receivable can serve as security.

Remember, providing collateral can sometimes dictate the outcome of the lender approval process for a business line of credit. And keeping in mind the criticality of clauses, a "zero balance clause," which demands you to maintain a zero outstanding balance for a set period, can fuss up your financing, posing a hurdle in your business growth.

Other Business Funding Alternatives for Smaller Construction Businesses

Traditional financing options may not always be available or suitable for small businesses in the construction industry. However, alternative funding options can provide the necessary capital to fund projects, purchase equipment, or cover other expenses. Here are some of the best alternative business funding options for construction small business owners.

1. Small Business Loan

Short-term business loans are term loans that provide a lump sum of money repaid over 6 to 18 months. When approved, you get a fixed amount of money and a fixed amount you have to pay back. The difference is the cost, with a set payment auto-deducted from your bank account monthly, bi-weekly, weekly, or in some cases daily. A construction loan that is short term has limited paperwork required, and credit standards are more lenient than that of banks or traditional construction loans.

Product Overview

  • Rate: Factor rates from 1.09% up to 1.45% (This is not an interest rate)
  • Repayment Terms: No term limits. Payments continue until paid in full based on specified percentage collection methods and are dependent on future sales.
  • Fees: Origination fees that range 0% to 5%
  • Payments: Weekly payments
  • Credit History: Poor to excellent accepted; All considered.
  • Minimum Monthly Revenue: $10,000 per month

*No down payment required

2. Construction Business Credit Cards

Construction credit cards are revolving lines of credit that offer low flexible monthly payments with an affordable interest rate. Check the loan agreement with a financial institution or bank that is offering business credit cards for interest rate, terms and all your costs.

Frequently Asked Questions

1. Are Construction to Permanent Loans Similar to a Builders Line of Credit?

Construction to permanent loan is not a Construction line of credit and is considered a renovation construction loan or under the umbrella of construction business loans with a schedule draw of funds once a stage of the project is completed and inspected. If it's a rental property, debt service coverage ratio to calculate monthly or annual income will be used for approval. A down payment may be required for a renovation construction loan.

2. Can a construction loan be likened to a line of credit?

Construction business Loans are loans with a lump sum of money that is provided, with a fixed term, fixed payment, and fixed costs. A line is revolving credit in which you can draw money at anytime up to a credit limit and only pay interest on current balance.

3. Does Advancepoint provide construction lines of credit or new construction loans based on real estate rather than revenue?

We currently do not have any products related to property investment or house flipping. You should contact a commercial mortgage company for construction line of credit or a new construction loan. We do know to get a new construction loan you will need a down payment.

4. Are Small Business Administration (SBA) Lines of Credit accessible to the Construction Trade?

SBA not only provides SBA loan programs but also lines of credit. The interest rate on these lines are quite desirable. Keep in mind, SBA loans have stricter business credit requirements whether line of credit or SBA loans, outstanding debts and credit analysis ratios are considered.

There are four types of SBA CAPLines: Construction Lines of Credit:

  • Seasonal CAPLines: This SBA line of credit is designed to provide cash flow to business owners who experience seasonal peaks and valleys in revenue. Funds can be used to cover increased labor costs and other expenses brought on by your business’s busy season.
  • Contract CAPLines: This kind of credit line is available to eligible small businesses that need funding to execute their working contracts. This can cover supplies, labor, materials and more.
  • Builders CAPLines: As the name implies, this SBA line of credit is for builders and general contractors who work on residential or commercial buildings. Funds can be used for expenses like materials or direct labor related to building or renovation projects.
  • Working CAPLines: This revolving line of credit provides business owners with working capital for all kinds of operating expenses. This can include labor, inventory, manufacturing and more. Working CAPLines may come with higher fees compared with those on other CAPLines.

How to Apply for a Construction Line of Credit

The following are the 4 basic steps to apply for a business line of Credit.

Step #1: Search for the Lender - Determine which construction loan lenders and/or business loan brokers you want to associate with for your business line of credit. Consider aspects like their debt to equity ratio, experience with business lines of credit, customer reviews, trademarks and reputation when making your selection.

Step #2: Initial Interview with the Financing Company - Conduct an interview with potential construction loan lenders you may want to work with and determine rates, terms, and requirements. Ask about the risk of contractor defaults and what is involved in the application process and what documents will be needed to secure approval and funding.

Step 3#: Take Application - Fill out the application with required business and personal information. Provide necessary documentation like business bank statements and potentially a business tax return (in some cases) which helps the lender measure your shareholder equity.

Step 4#: Consider Offers - Once you receive an offer, consider the rate, terms and conditions of the offer. Take into account the equity ratio, credit limit amount, length of time (amortization) of the credit line such as 6, 12, 18, 24, or 36 months. Learn about the draw-off line process and ways to pay it down. Some lenders are easier to deal with than others on this issue.

Step 5#: Make Selection & Activate Line of Credit - Notify your chosen financing company of your decision and request agreement as well as closing stipulations to activate your line of credit. Once the financing company completes the boarding process, your business line of credit will be activated, and you are set to utilize the line as you wish.

The Bottom Line

Getting a line of credit for contractors is not as difficult as one would think. Buoyed by an array of contractor financing solutions, businesses have more options than just traditional construction loans. In fact, financing solutions such as construction line of credit offer considerable flexibility that conventional financing loans may lack. This is one of the many reasons why construction line of credit has become an ideal financing solution. If you perceive your business to stand to gain from such a contractor line, payments contractors can handle comfortably, don’t delay in applying. Being keen on maximizing their debt to equity ratio, many sensible entrepreneurs consider lender approvals before inking the deal with a financing solution.

Advancepoint Capital offers an opportunity to  get a free quote with zero impact on your credit score. Find out if you qualify and kickstart the growth of your construction business today! This is your chance to fully leverage the potential of contractor financing solutions for your growth.

Jacques Famy Jr

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