Contractors build strong bank and surety relationships with accurate, on-time financial statements, a current WIP schedule, a cash flow forecast, and no surprises. Your bank decides your line of credit and your surety decides your bonding line, and both base it on how much they trust your numbers and your management.
This guide covers what a line of credit is for, what banks and sureties look at, loan covenants, and how to build the relationship before you need it.
What a line of credit is for
A line of credit for contractors covers the gap between paying for labor, materials and subs and getting paid by the owner. It’s for timing, not for covering losses or buying equipment. Equipment is better financed with a term loan or a lease.
What banks look at
- Capital: enough to cover your risks, surprises and planned growth
- Asset quality: receivables and other assets worth what the books say
- Management: a team that knows the numbers, explains the plan and answers questions quickly
- Earnings: steady core earnings and costs in line with your industry
- Liquidity: cash management and a cash flow forecast that show you can pay on time
- Market risk: a plan for swings in material prices and interest rates
What sureties look at
- Working capital and equity on your balance sheet
- Your WIP schedule, and whether profit holds up job by job
- Your track record with the size and type of work you bid
- Year-end CPA statements at the level your program requires, from a compilation up to an audit
- The people running the company and how they answer questions
Loan covenants
Most lines of credit come with covenants: financial tests you have to meet, like a minimum net worth, a maximum debt-to-equity ratio or a minimum debt service coverage. Your bank checks them from the statements you send, often every quarter. Run the numbers yourself before the bank does. If you’re going to miss one, call your banker before the statements go out, and bring a plan.
Timing matters. One of our clients had a covenant that required a minimum cash balance at the end of each quarter. We told them which payments weren’t due yet and could go out on the first of the next month. They sent every check out in the last week of the quarter anyway, missed the minimum and had a problem with their bank. The plan was simple; the hard part was getting everyone to follow it.
How to build the relationship
- Send statements on time, every time.
- Send a current WIP schedule with your financials.
- Share your cash flow forecast before you need to borrow.
- Meet with your banker and surety agent regularly, not only when you need something.
- Ask before you need it. Increase your line or bonding before the big job, not in the middle of it.
- Share bad news early, with a plan.
- Know your covenants and check them every quarter.
What better numbers did for two contractors
We helped one construction company get a larger bonding line so it could take on more public work, and helped another reestablish its bonding and bank lines.
When to look for a new bank
- Your bank doesn’t understand construction: retainage, WIP schedules, percentage of completion.
- It won’t grow your line as you grow.
- Your banker keeps changing.
We have relationships with banks and lenders, and we’ve helped construction companies get lines of credit, term loans and mortgage loans.
How we help
We prepare the financial statements, WIP schedules and covenant reports your bank and surety ask for, answer your underwriter’s questions, and help you find the right financing. See our bonding and bank lines for contractors, read about construction cash flow, or see all our construction accounting services.
FAQs
How do contractors get a line of credit?
With accurate financial statements, a current WIP schedule and a cash flow forecast that show the bank you can repay, plus a track record of steady earnings.
What do banks look at before lending to a contractor?
Capital, asset quality, management, earnings, liquidity, and how you handle market risks like material prices and interest rates.
What are loan covenants?
Financial tests in your loan agreement, like a minimum net worth or a maximum debt-to-equity ratio, that you have to meet to keep the line in good standing.
How can a contractor get a bigger bonding line?
Build working capital and equity, keep profit steady from job to job, deliver CPA statements at the level your surety needs, and keep your WIP schedule current.
Should a contractor use a line of credit to buy equipment?
Usually not. A line of credit covers timing gaps on jobs; equipment is better financed with a term loan or a lease.
