Effective Steps to Get a Construction Line of Credit in 2023

By Joe Camberato

In a competitive plumbing and heating industry, it’s essential to have access to a capital source as you grow and scale your business. There are many different options at your disposal, with each one having unique advantages for certain situations, but no financing solution has more flexibility and fewer limitations than a construction line of credit.

Lines of credit provide ongoing access to capital, where you draw funds on an as-needed basis to tackle challenges or take advantage of opportunities. Repayment follows a flexible schedule, and you only pay interest on the amount you draw, too. And, if you’re able to secure a revolving term, you can pull the same funds again once you’ve repaid, allowing you to always have cash on hand for what’s next for your business.

It’s a great resource for managing cash flow, whether you’re investing in your growth or managing your cash flow during a slow season. You can use the funds for new equipment, upfront project costs, payroll, vehicle maintenance expenses, insurance, rent and much more. You can also use the funds to bridge payment gaps caused by slow-paying clients, which can help you start the next job on the right foot—every time—and forecast for the future with increased clarity.

However, to maximize the benefits, you’ll need to make sure that the lender you’re working with offers terms that fit your business and where it’s headed.

Do Plumbing and Heating Businesses Need Lines of Credit?

No entrepreneur needs to open a line of credit for their business, but doing so can provide some much-needed liquidity, increase your purchasing power and simplify your cash flow management.

For example, say you have an upcoming contract with an important client. The start date is just around the corner, and you need to get supplies, but you’re still waiting on payment from your last job. Without that invoice, you won’t have enough working capital to purchase all the necessary supplies and complete the work. But, with a construction line of credit in place, you can draw the funds you need and take on any job with the supplies, equipment, and workforce you need.

Not all situations are this dire, of course, but there are many other ways to can leverage your credit line to grow your business. You can use the funds to cover the fluctuating cost of materials and supplies, update equipment to the latest standard, cover operational expenses, launch new marketing campaigns, take on new clients and much more—the choice is up to you.

How to Choose the Right Option

Establishing a line of credit is as easy as finding a lender offering this type of financing, but securing favorable terms isn’t as straightforward. Here are a few steps every entrepreneur should take when considering a construction line of credit.

Determine Your Business Needs

While your business’s financial background will determine what you qualify for, it’s important to start the process with a clear idea of the credit limit you’re seeking. That way, you’ll have a frame of reference once you start applying and receiving terms.

You’ll want to establish a credit limit that provides a financial cushion in case of emergency but isn’t too excessive. Although you only pay for the amount you draw on construction lines of credit, having more of a limit than you need can encourage unnecessary spending, which is a slippery slope.

Higher credit limits are more difficult to qualify for, too, so make sure to be realistic about what you’ll need to ensure you can move through the process as fast and efficiently as possible.

Research Bank and Non-Bank Lenders

You can establish a construction line of credit with most bank and non-bank lenders. First, you’ll need to check that you meet their minimum eligibility requirements, which generally include time in business, revenue, and credit score prerequisites.

Bank lenders often have higher qualifications than non-bank lenders, but non-bank lenders usually offer higher interest rates on average. Non-bank lenders also have an expedited underwriting process, where you can receive your funds within days, while bank lenders can take anywhere from 60 to 90 days from application to funding.

There’s no “best” type of lender; everyone’s business is different. It’s worthwhile to explore both of these lending options and compare their terms to ensure you aren’t missing out on a better deal.

Keep Collateral Requirements in Mind

Construction lines of credit come in two main formats: secured and unsecured. Secured lines of credit are “secured” by collateral, whereas unsecured lines of credit come with no collateral requirement.

Collateral can be a tangible asset, such as real estate and equipment, or intangible assets, like your accounts receivable and investment portfolio. Many entrepreneurs try to avoid offering collateral because they don’t want to risk losing a critical asset in their business, but remember that collateral makes it easier to lock in lower interest rates and higher credit limits.

Carefully Review Your Contract

The fine print of your contract can make or break your financing. In some cases, non-transparent lenders have snuck hidden fees and contingencies into contracts and complicated the lives of borrowers. A common example of this is “zero balance” clauses, which require borrowers to maintain a neutral account balance for a set period of time. If they don’t, they could be subject to fees and penalties.

Carefully reading your contract before you sign on the dotted line gives you an opportunity to identify these fees before they become an issue and change course if it’s not something you want to deal with.

Calculate Costs and Forecast

Once you have a few offers on the table, you should run the numbers and ensure that the offered terms are within the financial capability of your business. Consider your ROI with the interest rate factored in, and visualize your ability to make payments with your business’s profitability in mind.

Make sure to use real numbers rather than estimates during this stage, as you don’t want to find yourself struggling to manage your repayment later down the line.

Joe Camberato is the CEO and founder of National Business Capital, the leading FinTech marketplace, helping entrepreneurs access competitive financing fast through an easy-to-use online platform and experienced team. From SBA loans to lines of credit, equipment financing, and more, Joe and his team have completed 27,000+ transactions and helped clients secure over $2 billion in funding since 2007, helping entrepreneurs reach their full potential and outpace their competition.