Subcontractor Cash Flow — Line of Credit

A LINE OF CREDIT IS A TOOL. MOST SUBCONTRACTORS USE IT LIKE A LIFELINE.

QUICK ANSWER

A revolving line of credit is designed to bridge cash flow timing gaps — fund payroll while waiting on a pay app, cover a material deposit before the draw comes in. It is not designed to cover structural cash flow problems. Most subcontractors who keep drawing on the LOC without paying it back are using it to fund a billing lag problem, an overhead rate problem, or an AR problem. SPM fixes the underlying problem so the LOC becomes a tool instead of a dependency.

Banks approve lines of credit for subcontractors who can demonstrate clean WIP, a current ratio above 1.5x, and a 13-week cash flow forecast. SPM prepares every client to meet those three standards before the bank conversation happens.

BY JOSH LUEBKERPublished: June 2026Updated: June 2026

What Banks Require

Three Things That Determine Whether You Qualify.

1. Clean WIP Schedule

A WIP schedule shows the bank where every active project stands — contract value, billings to date, costs to date, estimated cost to complete, and projected profit. A bank underwriting a construction LOC wants to see a WIP schedule that closes cleanly — no material overbillings that suggest pulled-forward revenue, no large underbillings that suggest uncollected work, consistent gross margins across projects. SPM produces a clean, reconciled WIP schedule every month as part of the standard engagement. Most subcontractors who get turned down for a LOC do not have one.

2. Current Ratio Above 1.5x

The current ratio is current assets divided by current liabilities. A 1.5x ratio means for every dollar of short-term obligation, the business has $1.50 in liquid assets to cover it. Banks use 1.5x as the floor for construction LOC approval. Most subcontractors below this threshold got there by accumulating AP — vendor invoices aging past 30 days because cash was tight. SPM reduces AP aging as part of the cash control process, which improves the current ratio directly.

3. 13-Week Cash Flow Forecast

A bank wants to see that the owner understands what is coming in and going out for the next 90 days. A 13-week rolling cash flow forecast demonstrates financial sophistication and shows the bank that the LOC will be used as a bridge, not as ongoing funding. Most subcontractors cannot produce one on short notice. SPM builds and maintains this forecast for every client from day one. When the bank conversation happens, the forecast is already there.

How to Use It

A Tool for Timing Gaps, Not Structural Deficits.

RIGHT USE

Bridge a Specific Known Gap

You have a pay app submitted for $320K. It is 18 days out from receipt. Payroll is due in 5 days and the current balance does not cover it. Draw $80K on the LOC, make payroll, pay it back in 20 days when the pay app clears. The LOC is used for a specific gap with a known repayment date. This is what the LOC is designed for.

WRONG USE

Cover an Ongoing Cash Shortfall

The LOC creeps up $20K per month. No specific repayment event. Just less cash coming in than going out on a consistent basis. That is not a timing gap — that is a structural problem. Billing lag means invoices are going out 22 days late. Overhead running at 26% when it is bid at 10%. AR sitting in 60+ day buckets. The LOC is covering for problems that will not go away by drawing more on the line.

SPM APPROACH

Fix the Structural Problem First

Every SPM engagement that involves LOC issues starts with the diagnostic — what is the underlying cause of the LOC dependency? Most of the time it is billing lag (close it), overhead rate (recalculate it), or AR over 60 days (collect it). Jokerst came in with a $348K LOC maxed out. Within 30 days there was $309K in the bank. LOC was fully paid off in 60 days. Same business. Fixed system.

LOC BY TRADE

WHAT THE LINE IS ACTUALLY FOR, BY TRADE.

Civil: Mobilization Iron

Civil draws fund mobilization — moving machines, fuel, first-month labor on jobs that won't pay for 60 days. The healthy pattern: draw at mobilization, repay at first collection, rest at zero between. The unhealthy pattern: a balance that never rests because it's funding losses, not timing.

Concrete: Pour-Month Spikes

Three stacked pours mean ready-mix invoices landing net-30 while the pay app collects in 60. A concrete sub's LOC exists for exactly that 30-day spread — sized to the biggest realistic pour month, drawn against mapped receivables, repaid on schedule.

Electrical: The Gear Package

A $180K gear buy four months before it bills is the classic electrical draw. The discipline is pairing every draw to its receivable — and negotiating deposits and stored-material billing so the LOC carries less of the float in the first place.

Public Work: The Agency Float

DOT and municipal subs carry the longest earned-but-unpaid float in the industry. Their LOC is structural, not occasional — which makes the sizing math and the bank relationship more important, and makes clean books the difference between a $250K facility and a $750K one.

PROOF

FROM PANIC DRAWS TO PLANNED TOOL.

$348K → $0

A maxed line, retired in 60 days. A $6.7M civil contractor's LOC wasn't funding timing — it was funding a 30% overhead rate nobody had measured. Overhead cut to 17%, collections systematized, and the fully drawn $348K line was paid off in 60 days with $309K in the bank at day 30. The line didn't need to be bigger. The business needed to stop leaking.

$750K

New credit, approved after the cleanup. Another civil contractor cleared two maxed LOCs and an SBA loan in 90 days — then got approved for $750K in new credit he couldn't touch before. Banks don't lend into chaos; they lend into clean books and a 13-week forecast. The same financials that fixed the cash fixed the borrowing capacity.

Zero

The balance a healthy line rests at. A $2.3M electrical sub now carries an $80K line at zero balance with $89K in the bank — the line sitting ready as a tool instead of running maxed as life support. That resting state is the entire goal: capacity available for timing, never required for survival.

FAQ

Common Questions About Lines of Credit.

How big should our line of credit actually be?

Size it to your worst realistic timing gap, not your comfort: roughly one month of fully burdened operating costs plus your largest typical mobilization, which for most $3M–$8M subs lands between 8% and 15% of annual revenue. A $5M sub usually wants $400K–$750K of capacity. Then judge health by the resting pattern, not the limit — a $500K line that touches zero every quarter is a tool; a $200K line that never rests is a tourniquet. Banks read the pattern exactly the same way.

The bank keeps declining our increase — what are they seeing?

Almost always one of three things: a balance that never rests (signals structural losses, not timing), financials they can't trust (no WIP schedule, billing-basis books, a close that lands on the 25th), or a debt story with distress markers like MCAs. The fix is rarely a better pitch — it's the package: monthly closes by the 10th, a current WIP, a 13-week forecast, and 90 days of the line behaving like a timing tool. One SPM client went from un-bankable to a $750K approval on exactly that package. Banks fund evidence.

What do banks require to approve a construction LOC?

Clean WIP schedule, current ratio above 1.5x, 13-week cash flow forecast, and at least 2 years of tax returns with positive net income. Construction-specific lenders also want to see a backlog report. SPM prepares all of these as standard deliverables.

How large should a subcontractor's line of credit be?

A common rule of thumb is 10–15% of annual revenue. A $5M subcontractor should have a $500K–$750K LOC available. The right size depends on average project size and pay cycle length — longer pay cycles require a larger line to bridge the gap.

Why does my LOC keep going up instead of cycling?

A LOC that keeps accumulating without cycling back to zero is covering a structural cash flow problem, not a timing gap. Usually billing lag, overhead rate error, or AR that is not being collected systematically. SPM's financial diagnostic identifies which one and the fix sequence.

Can SPM help prepare for a LOC conversation with the bank?

Yes. SPM produces a clean WIP schedule, current ratio calculation, and 13-week cash flow forecast as standard deliverables. Many SPM clients have received LOC approvals after being previously turned down once SPM cleaned the financial picture.