A line of credit for contractors is a revolving limit you draw on to buy materials, make payroll, and mobilize jobs, then repay when the pay application clears. For a drywall sub running four crews and waiting 50 days on the GC, it covers the stretch between paying for the work and getting paid for it.
That drywall sub is a useful example to keep in mind. Call it a $1.9 million-a-year company with weekly payroll, a supplier that wants payment in 30 days, and general contractors who pay 50 days after each pay app is approved, minus 10% retainage. The business is profitable. It is also short on cash most months, because every new job pulls money out before any comes back in.
How does a line of credit for contractors work?
The lender approves a limit. You draw against it as costs come up, interest accrues only on what you've drawn, and as you repay, the available balance goes back up without a new application.
Through Sagamore's lending partners, business lines of credit run from $5,000 to $500,000. Most decisions come back in about 24 hours, and once the line is open, draws typically land the same or next business day.
For a contractor, the cycle usually looks like this:
- Draw to cover materials and the first weeks of labor on a new job.
- Bill the first pay app.
- Repay the draw when the GC or owner pays.
- Draw again for the next job.
The point is that the line follows the job, not the calendar. A line that goes up in month one and comes back down in month three is doing its job. A line that only ever goes up is a warning sign, covered below.
How much of a credit line does a contractor need?
Enough to cover your peak cash-out on the jobs you'll be running at the same time, less the cash you keep on hand. Take one job for the drywall sub:
- Contract: $260,000 over 8 weeks
- Materials: $45,000, paid in week 1
- Labor: $14,000 a week for 8 weeks, or $112,000
- Pay app 1: $130,000, billed at week 4, paid at week 11 (net $117,000 after retainage)
- Pay app 2: $130,000, billed at week 8, paid at week 15 (net $117,000)
- Retainage: $26,000 at closeout
By week 8, the company has spent $157,000 on this job and collected nothing. The first payment doesn't arrive until week 11. That $157,000 is the peak for one job.
Now stagger a second job of the same size to start four weeks later. At week 8, the second job has already used its materials and four weeks of labor, another $101,000. Peak cash-out across the two jobs is about $258,000.
If the company carries $100,000 of its own operating cash, the gap is roughly $158,000. A $150,000 to $200,000 line covers it with some room. A $500,000 line would be more than the business can sensibly carry, and lenders will size it against revenue and bank balances anyway.
Run the same math on your own backlog. Use real payment timing from your AR aging, not contract terms. If your GCs say net 30 and pay in 52 days, plan for 52.
What should a contractor use a credit line for?
Short gaps that the job itself will repay. Longer-lived costs belong on a different product.
| Cost | Use the line? | Better fit if not |
|---|---|---|
| Materials for a signed job | Yes | |
| Payroll between pay apps | Yes | |
| Mobilization, permits, bond premiums | Yes | |
| Supplier early-pay discounts | Yes, if the discount beats the cost of the draw | |
| Excavator, lift, or truck | No | Equipment financing |
| Hiring an estimator or a new crew ahead of backlog | Sometimes | Term loan over 6 to 60 months |
| Approved pay apps you want paid now | Sometimes | Factoring |
| Covering losses on an underbid job | No | Fix the bid, not the cash |
Putting a machine you'll run for eight years on a revolving line ties up your working capital for years and leaves nothing for the next job. Our guide to a line of credit vs. a term loan goes through the split in more detail, and construction contractor financing shows how equipment, lines, and receivables financing fit together across a whole job.
What do lenders look for before approving a contractor line?
Sagamore's lending partners start with three minimums for every product:
- A credit score of 600 or higher
- At least one year in business
- At least $400,000 in annual revenue
Past that, construction underwriters read your bank statements and your receivables closely. Expect to provide:
- 3 to 6 months of business bank statements
- An AR aging report showing who owes you and how late they are
- A work-in-progress (WIP) schedule or backlog summary
- Contractor's license and certificate of insurance
- Year-end financials or tax returns for larger limits
The full list is in our guide to documents needed for a business loan.
What makes a contractor's file stronger or weaker?
Stronger: deposits that track your billing schedule, several GCs or owners instead of one, a WIP schedule showing jobs are billed in line with cost, and no overdrafts.
Weaker: one GC making up most of your revenue, receivables past 90 days, existing daily or weekly debits from advances, and tax liens. An existing lender's UCC filing on all business assets can also block a new line until it's paid off or subordinated. Our explainer on UCC liens covers how that works.
Most lines also require a personal guarantee from owners. Read what a personal guarantee means before you sign one.
Should a contractor use a line of credit or invoice factoring?
They solve the same gap from opposite ends. A line is borrowing against your business as a whole. Factoring is selling specific approved pay apps for an advance of up to 90% of the eligible amount.
| Line of credit | Factoring | |
|---|---|---|
| Based mainly on | Your credit, revenue, and bank history | Your GC's or owner's payment record |
| Who the GC pays | You | The factor |
| Size | Fixed limit, $5K to $500K | Grows with your billing, $10K to $5M |
| Retainage | Draw against anything | Usually excluded |
| Fits when | You qualify and want flexibility | You're growing faster than a line allows |
Many contractors run both: factoring on the slowest GC's pay apps, a line for materials and everything else. Invoice factoring for construction companies goes deeper on pay apps, retainage, and lien waivers.
What mistakes do contractors make with a line of credit?
Four come up again and again.
Never bringing it down. Lenders review lines periodically. A balance that sits near the limit for months looks like a term loan you haven't admitted to, and it's a common reason a line gets reduced at renewal.
Using it to fund a losing job. If a job is underbid, the draw covers the loss today and the payment comes due anyway.
Stacking short-term advances alongside it. Daily-debit advances drain the same bank account the line is underwritten on. One of them can turn a strong file into a decline.
Applying when you're already short. A line is easiest to get when your statements look healthy. Set it up while you're between jobs, and it costs little to have it sitting there until bid season.
When should a contractor apply?
Before the job, not during it. If you're bidding work that will put more cash in the field than you can carry, get the line in place first and size it from your own WIP schedule. Sagamore is a broker, not a lender: one application goes to lenders that already handle construction financing, and the first review is a soft credit pull. Start an application and we'll show you what limits your file supports.
