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TL;DR: A construction subcontractor line of credit should be sized to cover 2.5 months of direct costs plus a 20-25% buffer. At $4M revenue with 75% direct cost ratio that is $750K. A LOC below working capital requirements will be maxed constantly regardless of profitability. Most subcontractors whose LOC is always maxed have a sizing problem not a cash flow problem.
Working Capital
How Much Line of Credit Does a
Subcontractor Need?
A LOC sized below working capital requirements will be maxed constantly. A LOC sized correctly stays mostly unused except during heavy mobilization periods. Here is the formula.
Published: May 2026 · Updated: May 2026
The Formula
How to Size Your Line of Credit
Working capital requirement = monthly direct costs times 2.5. Monthly direct costs = annual direct costs divided by 12. Annual direct costs = revenue times direct cost ratio (typically 72-80% for commercial subcontractors). Add 20-25% buffer for LOC size. That is the LOC you need to operate without constant draws.
| Revenue | Direct Cost Ratio | Monthly Direct Cost | Working Capital Need | LOC Target (with buffer) |
|---|
| $2M | 75% | $125,000 | $312,500 | $375,000 |
| $3M | 75% | $187,500 | $468,750 | $562,500 |
| $4M | 75% | $250,000 | $625,000 | $750,000 |
| $5M | 76% | $316,667 | $791,667 | $950,000 |
| $7M | 76% | $441,667 | $1,104,167 | $1,325,000 |
| $10M | 77% | $641,667 | $1,604,167 | $1,925,000 |
FAQ
Frequently Asked Questions
How much line of credit does a construction subcontractor need?
The line of credit should cover working capital requirements plus a 20-25% buffer. Working capital requirement = monthly direct costs times 2.5. At $4M revenue with 75% direct cost ratio: $250K per month times 2.5 = $625K. Add 20% buffer = $750K LOC. If the LOC is below working capital requirements it will be drawn to the limit constantly regardless of profitability.
Why is my construction line of credit always maxed?
Three causes: the LOC is sized below actual working capital requirements, revenue grew faster than the LOC was increased, or billing timing gaps are consuming LOC capacity that should be reserved for payroll and materials. A LOC maxed on Monday payroll with a pay app approval pending on Wednesday is a timing problem. A LOC maxed with no pay apps pending and no near-term collections is a sizing or billing problem.
How do I increase my construction line of credit?
Three things banks look at: current ratio (current assets divided by current liabilities - target above 1.2), net profit margin over the last 2-3 years, and net worth growth trend. Accurate WIP reporting that shows the financial statements are reliable also matters. SPM produces all of the financial documentation that supports LOC increase requests as standard deliverables.
Should a construction subcontractor use a line of credit for equipment?
No. Equipment should be financed with term debt (equipment loan or lease) not a revolving line of credit. A LOC used for equipment purchase is consumed by a fixed asset and cannot be replenished through normal collections. The LOC should be reserved for working capital - the short-term cash gap between cost and collection on active jobs.
