Sixty-seven percent of subcontractors use bank lines of credit as a source of working capital*. The flexibility of a bank line is an advantage over other forms of capital like supplier terms, yet the actual capacity it provides is often overestimated. Consider this: While a $1M bank line of credit sounds impressive, more than half of subcontractors find their credit capacity accounts for less than 10% of their annual revenue*.
To ensure your line of credit remains a strategic asset rather than a limited option, it’s important to understand the mechanics of what’s required to secure a line of credit, the different types of credit available, and how to use them strategically.
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What Is A Line Of Credit?
A bank line of credit is a predetermined amount of capital that can be drawn on, which is issued to a contractor by a lender. Unlike a typical loan, a bank line of credit is not heavily monitored by the bank, meaning subcontractors have greater flexibility in what purchases they can use it for, similar to a credit card. Additionally, there will likely be a comprehensive application process subcontractors must fill out, and they must meet certain requirements to get approved.
Some benefits lines of credit can offer subcontractors include:
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- Flexibility – Subcontractors can utilize these funds whenever and however they’d like, assuming the account is up to date and credit is still available.
- Interest-Only Payments – Subcontractors will be required to pay interest-only payments on the outstanding balance. These lines of credit are usually not amortized, meaning the principal balance will not be paid down over the life of the loan with a set payment schedule.
- No Prepayment Penalties – At any point you have the cash available to do so, you can pay down your line of credit to $0, with no penalties, unlike other types of loans.
Subontractor-Specific Risks With Bank Lines of Credit
Potential Immediate Reduction of Credit Limit
Lines of credit typically offer higher credit limits compared to a standard credit card. This may seem ideal for subcontractors who spend thousands per week on materials or labor. However, large expenses, higher credit limits and minimal restrictions from the bank are a tempting combination that put contractors at greater risk of maxing out their limit. There are also tighter penalties when a subcontractor misses a payment. Missing a payment could result in a drastic decrease in their limit at any time. In many cases, the cut in your credit limit goes to your current balance, leaving no room for additional purchases. If a bank loses trust in a contractor, it can be very difficult to raise their credit limit in the future.
Blanket Lien on Business
In addition, it’s fairly standard for banks to put a blanket lien on a construction business when issuing a line of credit to a subcontractor. In the event of non-payment, the bank reserves the right to seize all assets being used as collateral. This means that poor payments on your line of credit could put your entire business at risk. Unlike other financing options (such as project-based financing), lines of credit are not relationship-based. Traditional financial institutions have to assess their borrowers with cold objectivity, strictly looking at factors like on-time payments. In other words, don’t expect your “friendly neighborhood banker” to hear you out when you miss a payment.
What are the Different Types of Lines of Credit for Subontractors?
Understanding the differences between lines of credit can help you determine where each option fits within your capital stack. There are a few types of lines of credit available for subcontractors: secured, unsecured, and construction lines of credit.
Secured Bank Lines of Credit
A secured bank line of credit uses a company’s assets as collateral to ensure repayment. In secured agreements, the financial institution will hold a lien on any asset the subcontractor puts up for collateral. If the subcontractor defaults on a payment, the bank can then seize and liquidate the value of the asset.
Typically, because the financial institution has some form of guarantee, the borrowing limit is higher and the interest rate is lower than unsecured lines of credit. It is critical to note that in a secure line of credit, the contractor assumes some risk if they do not pay back their loan.
Unsecured Bank Lines of Credit
Unlike secure agreements, unsecured bank lines of credit do not require the subcontractor to put up an asset as collateral. Instead, the financial institution offers a lower credit limit with a higher interest rate. This gives the bank an opportunity to earn extra money, but leaves them more vulnerable if a contractor defaults on their payments.
Construction Lines of Credit
An additional option for subcontractors is a construction line of credit like Flex Line. This construction line of credit is specifically designed for the financial needs of subcontractors, offering up to $350,000 in available capital. The broad-based funds can be used to cover everyday expenses like materials, labor, and overhead, and there’s no cost to keep the line open.
Unlike traditional bank lines of credit, subcontractors can use the entire capacity of Flex Line without having to worry about keeping the line open for bonding capacity. Plus, subcontractors can gain approval in as soon as 24 hours.
What are the Requirements for a Line of Credit?
Lenders will only approve lines of credit if the contractor meets certain requirements that the lender deems acceptable. If you plan on taking out a line of credit, you’ll need to consider the following:
Company Revenue: Lenders like to see businesses that are profitable and large enough to justify the line of credit. The subcontractor’s revenue is the presumed method of payback so your annual revenue should justify the size of the line of credit you’re requesting.
Company History: Banks will look at how long your company has been in business for confidence in longevity. Companies younger than 2 years old are higher risk and less likely to get approved without putting up significant collateral.
Credit Analysis Ratios: It’s important to understand the different financial ratios that banks might investigate when doing their credit analysis. These scores are used to assess how well-equipped a business will be to pay back a debt.
- The core groups of credit analysis ratios (each of which include a handful of different types) are:
- Profitability Ratios – Measures the company’s ability to generate profit relative to assets, revenue, and shareholder equity.
For example: A Return on Assets ratio (ROA = Net Income / Average Assets) shows how much money the company returns in net profit for every dollar of assets the company invests in. - Leverage Ratios – Measures debt levels against cash flow, income, and other accounts on the balance sheet.
For example: A Debt to Equity ratio (D/E = Debts + Fixed Payments/Shareholder Equity) shows how much leverage creditors and shareholders each have over the company’s assets. - Coverage Ratios – Measures how well the company’s cash, income and assets can cover their interest and debt.
For Example: A Debt Service Coverage ratio (DSCR = Earnings Before Interest, Tax, Depreciation, Amortization / Interest + Principal) shows how well equipped the company is to repay interest and principal of existing debts with their operating income. - Liquidity Ratios – Measures the company’s ability to readily turn assets into cash.
For example: A Current ratio (CR = Current Assets/Current Liabilities) shows how easily a company can liquidate its assets to meet short-term financial obligations.
- Profitability Ratios – Measures the company’s ability to generate profit relative to assets, revenue, and shareholder equity.
Guarantees: A guarantee is an official agreement in which a guarantor, usually either a business or individual, takes responsibility for managing debt repayment in case the contractor defaults. Guarantees usually come in the form of a personal guarantee or corporate guarantee.
Personal Guarantees: Some banks will ask for a personal guarantee, especially with smaller businesses. In this case, they may ask you to put up some of your personal assets as collateral to ensure repayment.
Personal Credit History: Part of a financial institution’s due diligence is to assess the credit worthiness of all parties involved, including the contractor’s personal credit history.
Covenants: Covenants apply to both loans and lines of credit, and describe the terms and conditions of your line. Consult a legal entity to help navigate these agreements before signing.
How to Effectively Use Your Line of Credit
If a subcontractor is not diligent about their spending and repayment habits, they may find themselves maxing their credit limit or missing payments. That’s why incorporating your line of credit into your capital stack requires careful strategy and care.
There are some industry best practices to help you efficiently manage your line of credit:
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- Borrow only when there is a clear path to revenue: It’s best to be selective when drawing from your line of credit. Just because you are approved for a maximum credit amount does not mean you need to use it. Take steps to guarantee you will be paid for the work and will be able to promptly pay it off. (For example: You may want to reconsider putting expenses on your line of credit if you have a risky Pay if Paid clause in your contract, meaning you assumed the most risk.)
- Create a strategy for when to use your line of credit: The optimal way to use your capital is from least to most flexible. By using your least flexible options like supplier terms first, you can preserve your most flexible options like your cash and line of credit for unexpected opportunities or expenses.
- Build a strong history of timely repayment: Payment history is a significant factor that banks look at when evaluating your credit-worthiness, which is why it makes up over 35% of your credit score. Make your payments on time, and whenever possible, pay off your balance in full to help build strong payment history.
A Better Alternative to Traditional Lines of Credit
Lines of credit for subcontractors come with their share of risks and benefits, which subcontractors can assess based on their financial position. However, Flex Line was designed with the needs of the construction industry in mind. Built to match how subcontractors manage cash flow across active projects, payroll cycles, and vendor payments, Flex Line is built for simplicity and not limited for use on a single project.
*Source: 2026 National Subcontractor Market Report
