Guide
Getting a line of credit as a contractor
Banks decline contractors for predictable reasons. Most of them are fixable in a quarter.
Reviewed by Darren Lim, US CPALicence CPA.742536028 min read
A line of credit is the right tool for a contracting business. Money goes out on material and payroll before it comes in from the customer, and that gap is a cash flow problem rather than a profitability one.
The trouble is that contractors get declined at a higher rate than most small businesses, usually for reasons that were fixable months earlier.
What the lender is actually assessing
Underwriting comes down to four questions.
Can you service the debt? They calculate whether your cash flow comfortably covers your existing debt payments plus the new facility. Every truck payment and equipment loan you already carry reduces the headroom.
Are the financials credible? Not just profitable — believable. Books that do not reconcile, a balance sheet that does not balance, or loan balances that have not moved in two years tell an underwriter that nobody is minding the business.
Is the revenue stable? Two years of history is the usual expectation. Seasonal swings are fine and expected in the trades — unexplained swings are not.
What is behind it? Nearly always a personal guarantee for a business this size, so your personal credit is part of the assessment.
Why contractors get declined
In rough order of how often we see it.
The books are behind. You cannot produce current financials, so the application stalls before it starts. This alone accounts for an enormous share of declines.
The financials do not hold together. A P&L that shows healthy profit alongside a balance sheet where loans never amortise, draws sit in expenses, and the bank balance does not tie to a statement. It looks like carelessness at best.
Owner draws are unclear. Where personal and business spending are mixed, an underwriter cannot tell what the business actually earns, so they assume the worse figure.
Debt service is already tight. Three financed vehicles and a machine, and the headroom is gone before you ask.
No cash flow visibility. You are asking to borrow against a gap you cannot describe. "I need $75,000 because material goes out sixty days before the customer pays, and here is the receivables ageing that shows it" is a completely different conversation.
What to have ready
- Two years of financial statements — P&L and balance sheet, internally consistent
- Current interim financials, closed and reconciled to the most recent month
- Two years of business tax returns, which they will reconcile against your statements
- Recent business bank statements
- An aged receivables report — for a contractor this is often the most persuasive single document
- A debt schedule: every loan, the balance, the payment, the rate, the maturity
- Personal financial statement and tax returns for anyone guaranteeing
The item that most often does not exist is current interim financials. If your books are four months behind, you are months away from being able to apply, not days.
Preparing properly, a quarter ahead
Get current and stay current. Monthly close, reconciled. This is the whole foundation, and it is why an application should start a quarter before you need the money.
Fix the balance sheet. Loan balances matching lender statements. Draws in equity, not expenses. Fixed assets capitalised with depreciation running.
Separate personal spending. Genuinely, and going forward.
Do not add debt right before applying. Financing a van two months before the application reduces the headroom you are about to ask for.
Know your numbers. Be able to say your gross margin, your overhead, your break-even and what you are borrowing against. An owner who knows those four figures is treated very differently from one who defers every question to an accountant who is not in the room.
Ask before you need it
The best time to arrange a facility is when you do not need it. Applying while comfortable produces better terms and a calmer process than applying because payroll is Friday — and lenders can tell which situation they are looking at.
Related
How we do this
We build this into your books. Starting with a month that costs you nothing.
We close and reconcile every month, so current interim financials exist the day a lender asks for them. Draws in equity, loans amortising, and a receivables ageing that explains exactly what you are borrowing against.
- Every transaction categorized, accounts reconciled, the month closed
- Reviewed and signed by Darren Lim, US CPA — licence CPA.74253602
- The Two-Day Guarantee: Your first month back in two days, or the next month is free.
Most contractors get declined because their books are four months behind, not because the business is weak. That is fixable, but it has a lead time — and it starts with one month, done free, in two days. Ask before you need the money and the answer changes.