Having a large line of credit can mean the difference between success and bankruptcy for a small contractor. If you don't have a line of credit -- you need one. If your line of credit is too small to cover your costs in between projects, you need a larger one.
As a contractor, having a big enough credit line is crucial. You need to cover job costs, pay vendors for materials, meet payroll, and pay subs. And none of these people care if it will be a month or two before you the project is completed and you have the money to write those checks.
Withholding payment from suppliers and subcontractors is not an option. If you don't pay your subs on time, no one will want to work for you. If you don't pay your suppliers on time, your credit rating will suffer.
Bad business credit means increased borrowing costs, insurance costs, and bond costs. And it means you may not be able to increase the amount of any existing lines of credit.
So how much credit do you need?
A good rule of thumb is to carry a credit line equal to 10% of your annual sales.
If you don't have that, here's what you need to do...
1. Act before you need it
Plan ahead, and ask for an increase when your business is doing well. Don't wait until you are in desperate need for a new or increased line of credit. When business is good, you can present a stronger financial picture to the bank, and you become a more desirable candidate.
2. Gather your Financials
Get together with your accountant to prepare the documents you need to bring to your bank. These typically will be:
- Balance sheet for personal assets and liabilities
- Two years of reviewed business financial statements
- YTD business financial statements for current year
- 12 month cash flow budget showing projected sales, job expenses, overhead, monthly and year to date cash flow
3. Meet with your Banker
Present your documents to your banker and ask for an increase (or new) line of credit. If you cannot get what you are asking, contact your CPA, insurance agent, and bond agent to ask for other banking references.
4. Explore Alternative Financing
Don't take no for an answer. If you can't obtain the business financing you want through a traditional bank, look to alternative financing options. According to the U.S. Small Business Administration (SBA), alternative (non-bank) lenders are increasingly popular options for small business owners.
5. Run a Profitable Contracting Business
The bottom line is that your business will need to be profitable if you expect financing, whether it is traditional or alternative.
- Leave money in your business to keep your balance sheets strong
- Keep your debt to equity ratio as low as possible
- Have a good understanding of your P&L (profit and loss) statements and business overhead
- Don't miss payments or make delayed payments
A credit line is a powerful financial tool that will help keep your contracting business running smoothly, bills paid, credit high, and insurance costs low. Make sure you have one ready for when you need it.
