A line of credit is one of the most useful tools a subcontractor can have.
The same line is also one of the fastest ways to pile up debt a business can't pay back.
The difference comes down to what the line is paying for. Most owners have never checked. This month, I'll show you how, and it takes about 10 minutes.
What a Line of Credit Is For
Construction has a timing problem built into it. You pay your crew every week. You pay your suppliers on 30 days. The GC pays you in 45, 60, or 90 days, and holds 5 to 10% in retention on top of that.
A line of credit covers that gap. You draw on it to make payroll while a pay app is out. When the pay app gets paid, the money goes back to the bank.
A line that moves that way is healthy. The balance goes up when you spend and comes back down when you collect, because the jobs underneath it are making money.
What It Isn't For
A line of credit can't fix a job that loses money.
If a job costs more than you billed for it, there's no pay app coming that will refill the line. The money is gone. The line just covers it up for a while.
Here's where a lot of owners get in trouble. Banks look at revenue and backlog, and they approve the line. But demand does not equal profit, and a full backlog doesn't prove you can pay a loan back.
I don't think a bank should issue a line of credit until the business proves it's profitable. Most banks don't wait for that proof. So you have to be the one who checks.
The 10-Minute Test
Pull your line of credit balance at the end of each of the last 12 months. Write the 12 numbers in a row.
Now look at what the balance does after your biggest collection months.
If it comes down after you collect, the line is covering timing. Good.
If it only climbs, or it hasn't been near $0 in a year, the line is covering losses. You're borrowing to fund jobs that aren't paying for themselves, and every draw makes the hole deeper.
A climbing balance doesn't mean the business is doomed. You just need to find out which jobs are losing money and why, before you draw another dollar.
What It Looks Like In Action
A roofing company we brought on this year was doing $5 million, with $10 million already in backlog for next year. The owners hadn't paid themselves in 3 weeks.
Their lines of credit had been covering for a lack of accounting standards.
First, we pushed collections on money they had already earned and got their billing ahead of the work. Within 2 weeks, the owners were caught up on back pay.
Then we went through their estimating. They had been bidding every job at a lump-sum 35% markup, because 35% sounded like it would be enough. Now each job is priced from what that job will actually cost, so we know it covers overhead and makes a profit.
Since then, they haven't had a problem staying ahead of cash flow. They paid back their lines of credit.
And here's my favorite part. They still have the lines. Now they use them for planned growth instead of covering for missing accounting standards.
Go and Do
This week, run the 10-minute test. Pull 12 month-end balances on your line of credit and write them in a row.
If the balance comes down after big collection months, you're using the line the right way. Keep going.
If it only goes up, stop and find out whether your jobs are making money before you draw on it again. Start with your job costing and your overhead rate, because that's where the losses usually hide.
One More Thing
Chapter 1 of my book CONTROL walks through setting up job costing so you can see which jobs make money and which ones don't. If your line only goes up, that's the place to start.
You can get it here: https://www.amazon.com/dp/B0HBCSJY9G
