Construction is a lucrative industry, but the benefits are only attainable if you have the cash flow to operate at your highest capacity.
Whether you’ve operated for 10+ years in your space or you’re just getting started, it’s important to have a capital source in place for when you need liquidity. Some entrepreneurs choose to leverage construction loans or equipment financing, but if you’re looking for the most flexible option, you can’t go wrong with a construction line of credit.
Lines of credit allow you to draw physical cash on an as-needed basis for any business expense or opportunity. Continue reading for a breakdown of construction lines of credit and, more importantly, how to leverage this type of financing to grow your business.
What Is a Construction Line of Credit, and How Does It Work?
Construction lines of credit are a type of business financing that allows you to draw funds on a flexible schedule and manage the repayments over time. Here’s how the process works.
- You establish a line of credit with a bank or non-bank lender
- Once in place, you can draw capital for any business expense
- You pay off your balance on a flexible schedule, much like a credit card
Another key benefit of construction lines of credit is that you only pay interest on the amount you’ve borrowed, not the total credit limit. If your line has a “revolving” term, you can draw the same funds again after you’ve paid off your existing balance.
Benefits of Using a Line of Credit to Grow Your Construction Business
Business lines of credit are a powerful financial resource for businesses of all sizes. The flexibility allows borrowers to draw funds whenever necessary, and the repayment structure provides a more manageable schedule to cover liabilities. For this reason, almost every growing business should, at the very least, consider leveraging one in their business.
Here are a few of the many benefits of a business line of credit.
- Quickly draw funds for any business purpose
- Only pay interest on the amount drawn
- Streamlined cash flow
- Avoid using cash reserves to cover unexpected expenses or take advantage of unexpected opportunities
- Complement your income to increase purchasing power, allowing you to afford more expensive assets, relationships, and opportunities
- Bridge payment gaps between projects
The seasonality of construction and contracting businesses can strain cash flow and make it difficult to get back to work. With a line of credit, you can start your busy season on the right foot and repay what you’ve borrowed as you generate revenue.
What’s the Difference Between Unsecured and Secured Construction Lines of Credit?
Construction lines of credit come in two main formats: secured and unsecured. Much like other financing products, the main difference between the two is collateral.
|Type of Financing||Description|
|Secured Lines of Credit||A secured business line of credit is backed by a collateral offering. This can be a tangible asset, like real estate or equipment, or an intangible asset, like your accounts receivable or intellectual property. If you default on your repayment, the lender can seize the collateralized asset as a method of recouping the unpaid funds.|
|Unsecured Lines of Credit||Unsecured lines of credit don’t require a collateral offering. This is most people’s preferred option, but you should consider the strict eligibility criteria that come along with this type of financing. Generally speaking, unsecured lines of credit come with higher minimum credit scores and more substantial revenue requirements.|
Think about it: Lenders use collateral as an added layer of protection against defaults. By not requiring collateral, the lender is at an increased risk of losing out on the borrowed funds, so they’ll raise the minimum eligibility requirements for an added layer of protection.
How a Line of Credit Can Help Construction Businesses Grow
Business lines of credit provide near-instantaneous liquidity. When cash flow is tight, businesses can use line of credit funds to streamline operations and keep themselves running at the highest capacity.
Here are a few ways that construction businesses can grow using a line of credit.
- Streamline Cash Flow – Whether entering your busy season or finding yourself with a challenge, a line of credit can streamline business cash flow and operations. You can pay for equipment, materials, payroll, and more, even when cash is tight, to start every job with confidence.
- Bridge Payment Delays – Late customer payments can leave you without the resources to start the next job. With a line of credit, you can cover operating expenses as invoices come in and prevent interruptions.
- Increase Purchasing Power – Your borrowed funds can complement your income and raise your purchasing power, allowing you to purchase more expensive assets and opportunities. For example, you may be able to leverage your line of credit to secure materials in bulk and qualify for a supplier discount.
- Maintain Your Pace – Unexpected expenses can force you to hit the brakes on your business, like equipment needing sudden repairs or a complete replacement. A line of credit allows you to cover these expenses promptly and never take your foot off the gas pedal.
How Can You Use a Construction Line of Credit?
You aren’t limited in how you use the funds from your construction line of credit as long as you’re using it for business purposes. Here are a few of the ways construction businesses use business lines of credit.
- Manage cash flow
- Bridge payment gaps
- Increase purchasing power
- Purchase upfront materials/supplies for projects
- Payroll, rent, and other operational expenses
- Maintain existing equipment
- Purchase new equipment
- Marketing campaigns
- CRM and other technological investments
- Emergency funds
It’s easy to start using your line of credit for everything once you get it, but it’s important that you manage your financing responsibly. Overuse can bring your balance close to your credit limit and leave you without funds for emergencies or unexpected opportunities. For this reason, it’s important to keep track of your spending and monitor your balance on a consistent basis.
How Do Interest Payments Work?
For most loan options, you’ll pay interest on the entire loan amount. But, for business lines of credit, you only pay interest on the amount you’ve drawn.
Interest rates vary from 8% to 60%, depending on the financial background of your business and the lender you’re working with.
Let’s say you have a line of credit with a limit of $100,000. If you draw $30,000 from your line, you only pay interest on that $30,000 rather than the full $100,000.
The structure allows you to keep your line of credit in your back pocket when you need it, but you should be wary of hidden fees and contingencies in your contract. Something like a “zero balance clause,” which requires you to hold a zero outstanding balance for a set period of time, can significantly complicate your financing and make it difficult to grow. For the best results, work with a transparent lender, and ensure you’ve read over the entirety of your contract before signing on the dotted line.
Why Choose a Construction Line of Credit Over Other Financing Options?
Other financing solutions, like term loans, equipment financing, and revenue-based financing, come in one-time lump sum payments, where you’re provided a set amount of money and a schedule to pay it back. Lenders may require a detailed business plan before approving you. And, if you need additional capital for any reason, you have to speak with your lender and take out a completely new loan.
Construction lines of credit are much more flexible in their application. Once you establish the credit line with a lender, you can draw funds on your schedule and never have to worry about asking permission to use your funds.
Here are a few of the benefits construction lines of credit hold over other financing products.
- Draw capital on an as-needed basis
- Only pay interest on what you draw
- Draw on the same funds once you’ve repaid
- Have consistent access to capital without the hassle of taking out a new loan when you need additional funds
How Do You Qualify for a Construction Line of Credit, and What Are the Requirements?
Bank and non-bank lenders all have different eligibility requirements for construction lines of credit.
|Type of Lender||Time in Business||Annual Revenue||Credit Score|
|Bank or Credit Union||2+ Years||$850,000+||720+ FICO|
|Non-Bank Lender||1+ Year||$500,000||660+ FICO|
Keep in mind that the only way to ensure you’re selecting the best offer for your business is by shopping around and comparing approvals. This means you’ll have to fill out multiple applications and wait for a decision on each, which can take weeks or even months in some cases. If you’re looking to streamline your search for a construction line of credit, you should consider working with a FinTech marketplace.
How to Apply for a Construction Line of Credit
It’s not as simple as typing “line of credit for construction company” into your search bar. If you’re applying to lenders directly, here are the steps you’ll need to take.
- Research and Compare Lenders – First, you’ll need to find a few lenders that align with your business goals. If possible, come up with a list of 5-10 lenders that you can qualify with.
- Prepare Relevant Documentation – Once you have a solid list, you’ll start to prepare the documentation needed for your applications. The specific documentation varies from lender to lender, but come prepared with business bank statements, business tax returns, and your EIN number, at the very least.
- Fill Out Applications and Wait for Decisions – Next, you’ll start to fill out applications with the lenders of your choice. Nonbank lenders typically return decisions within 24 hours, while banks can take up to 90 days to review your application.
- Finalize a Contract – You’ll review your approvals, select the best one, and work with the lender to finalize your contract. Your funds should be distributed promptly, and you can start investing them into your business as soon as you get them.
Marketplaces are a way around the above steps. Instead of researching, comparing, and applying with multiple lenders, you complete one application and receive multiple offers. At National Business Capital, our team leverages a 75+ lender marketplace to find the most competitive offers our clients qualify for.
Why Choose National Business Capital for a Construction Line of Credit?
There’s no reason to wait 5-6 weeks for the funds you need to grow. With a network of 75+ lending partners and an award-winning team behind every funding, National Business Capital is a time-saving machine for entrepreneurs looking to grow and scale their businesses.
We’ve secured $2 billion through 27,000 transactions, earning over 3,000 5-star reviews from satisfied entrepreneurs and “Driving Growth for All” every step of the way. Complete our digital application to get started and see firsthand the speed, simplicity, and professionalism that made us who we are today.
Frequently Asked Questions
Why Would a Construction Company Need a Line of Credit?
Construction companies can leverage lines of credit to
- Bridge payment gaps
- Manage cash flow
- Pay employees
- Cover operational expenses
- Purchase materials for projects
- And much more
This type of financing can act as a financial safety net or a resource to drive success in your business.
Is a Line of Credit a Good Way to Build Credit?
Yes! Making consistent, timely payments on your line of credit strengthens your credit score. Late payments and defaults have the opposite effect on your credit score, so make sure to manage your repayment carefully.
When Should You Not Use a Line of Credit?
Lines of credit are best used for recurring payments or less expensive one-off purchases. If you’re looking to make a more significant purchase, you might find more benefit in a structured form of financing, like a term loan or SBA loan, because of the higher funding amounts and longer repayment terms associated with these types of financing. Lines of credit tend to carry higher interest rates, too, which makes them less helpful for major purchases.