Why Every Builder Should Have A Line of Credit (LOC)

As most construction business owners know, managing cash flow is one of the most critical factors in running a successful operation. This holds true across the industry: general contractors, subcontractors, and developers alike. In a separate blog post, we break down the cash-flow challenges that are unique to construction and outline strategies to help maximize available cash and keep operations running smoothly.

Recently, we worked with a client where we implemented many of these best practices. We significantly improved collections (driving down accounts receivable), stretched payables to their due dates, adjusted pricing to account for increased labor costs, and increased upfront deposit requirements for new clients. As we tracked the budget and forecast throughout the year, the business was trending positively and on pace for a more profitable year, despite lower overall revenue (a topic we’ll save for another post).

That said, even with strong controls in place, we ran into a cash crunch during payroll over the Thanksgiving holiday week. The primary cause was a client wire that was processed and expected but ultimately bounced. In hindsight, there were steps that could have mitigated the situation, such as holding certain payables until the wire fully cleared or temporarily floating a higher credit card balance (though this is far from ideal given 20%+ interest rates) or requiring a higher reserve balance. Despite diligent week-to-week forecasting and close monitoring of budgets and cash flow, this issue still arose.

For additional context, this residential general contractor carries higher loan balances stemming from a few challenging years in the past. They previously had a line of credit that was converted into a term loan following a missed paydown requirement (termed out). We had recently discussed setting up a new line of credit and had even begun the process, anticipating slower cash inflows around the holidays. Unfortunately, we were a few weeks too late in getting it finalized.

The takeaway is this: no matter how clean your financials are or how closely you track and forecast cash, unexpected issues (such as a bounced payment or delayed final invoices during punch-list completion) can still occur. While risk can be mitigated through contract structure, deposit requirements, and maintaining reserve cash, having a line of credit in place provides an additional layer of protection. It’s a reserve you hope never to rely on, but one that can be invaluable when timing issues inevitably arise.