Managing Economic Challenges: How Contractors Can Effectively Handle Bank Lines of Credit

Economic challenges can come in many ways for contractors, including a downturn in the global economy, a natural disaster that hits home, a bankrupt project in the middle of a job, legal issues, and more. These issues can creep up unnoticed, resulting in long-term after-effects.

The economic downturn of 2008 and 2009 severely impacted the construction industry, causing many construction companies to shut down. I remember it clearly, as I ran a general contracting business that built grocery stores and had numerous conversations with my subcontractors. Many were overextended at the bank, and their lines of credit were called in.

Running a contracting business requires capital and a strong relationship with your bank/lender. Contractors often receive a line of credit from a bank to help manage cash flow between project payouts until they can fully finance their weekly payroll and other expenses. A 2021 report found that 28% of subcontractors use a line of credit to expand their business. With this arrangement, contractors can call the bank to have funds deposited into their business account without needing paperwork each time. The bank and contractor negotiate the credit limit, interest rate, and terms at the onset. While these credit lines often have a maturity date, the bank can always demand full repayment. Many contractors were caught off guard when their lines of credit ended unexpectedly, a move directed by federal bank regulators.

Avoiding overextension at the bank is crucial for navigating economic challenges. Here are some tips to help you stay on track:

1. Instead of continuously drawing on your line of credit, focus on paying it down. Contractors often face temptations to make purchases, but maintaining discipline is key.

2. Define the specific purpose of your credit line and establish a clear repayment plan.

3. Aim to pay off your credit line every two or three months. This discipline will build trust with your bank.

4. Avoid using your credit line for non-business expenses. Talk to your financial institution if you want to buy a vehicle or a piece of land. They may give you better options with lower interest rates.

5. Keep each project's finances separate. Don’t rob Peter to pay Paul. Ensure you pay for project expenses with revenue or reserves from that project and avoid falling behind on payments.

6. Track and update your project costs weekly and project your total completion cost to stay on top of finances.

7. Visit your banker every few months for a quick check-in. Update them on completed projects, current work, and upcoming projects. This ongoing communication will help maintain a strong relationship and give the bank confidence in your account.

8. Strive for financial independence and reduce reliance on your credit line. This milestone is worth celebrating and can benefit your business in the long run.

Just as a strong relationship with your bank is critical for your success, it is equally important for your insurance company to understand your business and be an integral part of your risk management team. Acuity insures over 70,000 contractors and understands the contracting industry and its unique needs.

Source: https://billd.com/billd-subcontractor-market-report-2021/