Understanding Construction Lines of Credit: A Comprehensive Guide

What is a construction line of credit?

A business line of credit helps construction-related industries maintain ongoing access to capital. It’s similar to a credit card in that you have access to a credit line and only pay interest on the amount of money you borrow. Once you repay your balance, you can continually borrow from the line of credit for the rest of its term.

Having a line of credit comes with a lot of benefits for construction-related businesses. It helps companies manage cash flow during periods of large expenses, including insurance premiums, licenses and permits, raw materials, and payroll.

Secured vs. unsecured lines of credit.

Secured and unsecured lines of credit constitute two primary categories of construction lines of credit.

A secured line of credit involves collateral, such as equipment or real estate, which the lender can claim if the borrower defaults on the loan. This type of credit is typically larger, with lower interest rates due to the reduced risk for the lender.

An unsecured line of credit doesn’t require collateral. However, they usually come with higher interest rates and require a strong credit history for approval, due to the higher risk posed to the lender. These options cater to different needs, and the choice between a secured or unsecured line of credit should be based on the borrower’s financial situation and risk tolerance.

Line of credit options for startups.

While it’s generally harder for young companies to qualify for financing, some lenders will offer a line of credit to businesses with a minimum time in business of at least six months if you meet the other eligibility criteria. Learn more about specific lines of credit available to startups here.

Benefits of a construction line of credit.

Some of the benefits of a business line of credit include:

• Flexibility – Businesses don’t have to draw on the entire credit line if they don’t need it, unlike a traditional loan where the full amount is typically disbursed at once.
• Easy access to funds – Borrowers can access funds quickly and easily when needed, without having to reapply for a loan every time.
• Better cash flow management – A line of credit can help businesses stay afloat during lean times or when facing unexpected expenses.
• Lower interest rates – Compared to other types of financing options, lines of credit often have lower interest rates, which can save businesses money in the long run.
• Increased purchasing power – With a line of credit, businesses have more purchasing power and can take advantage of discounts.

Line of credit for contractors.

Contractors are especially susceptible to cash flow issues, especially while waiting on customers to pay invoices on time and purchasing materials to start a new job. And when managing larger projects with employees or subcontractors, there’s even more capital required to cover payroll costs.

To stay liquid, a line of credit for contractors helps even out inconsistent income. A line of credit can also help you grow your business by funding the upfront costs of new projects as demand for your services grows.

How can you use a construction line of credit?

A construction company can use a line of credit for a number of different purposes, such as:

• Purchasing equipment – When old equipment breaks down or new projects demand more specific machinery, a line of credit can be used to purchase or lease needed equipment. This can help avoid project delays and lost productivity.
• Buying materials – Construction projects require a lot of raw materials upfront. A line of credit allows for these materials to be purchased and costs managed until clients make their payments.
• Managing payroll – During periods of heavy work, construction companies may need to employ more workers. A line of credit can be used to cover these additional payroll costs.
• Expansion – When a company is looking to expand its operations—either by taking on more projects or increasing its physical footprint—a construction line of credit can provide the necessary funds.
• Emergency expenses – In construction, unexpected costs are a given. Whether it’s damage that needs repairing, cost overruns, or abrupt changes in project scope, a line of credit can cover these unexpected expenses.
• Marketing and advertising – To attract new clients and bid on larger projects, construction companies often need to invest in marketing and advertising. A line of credit can be used to finance these efforts.

Requirements for a construction line of credit.

Lenders consider three primary factors when evaluating a construction industry line of credit. Here’s what they’ll look for:

• Time in business – Currently, most lenders want borrowing companies to have been in business for at least six months.
• Revenue – Lenders vary but most will be looking for construction businesses that can show gross revenue of at least $50,000 per year.
• Credit score – Currently, lenders in the Lendio network require a personal credit score of at least 600.

Business loans vs. line of credit

In the construction industry, understanding the distinct differences between traditional business loans and a line of credit can help determine which financing option is best suited for your individual business needs.

How to apply for a line of credit for your construction business.

Applying for a line of credit is similar to applying for any other type of financing. You’ll need to provide standard business and personal information, along with some additional details specific to your construction industry, such as:

• Copies of contracts or purchase orders from current projects.
• A list of equipment you own or lease.
• Estimated budgets for upcoming projects.
• Financial statements and tax returns for your business.