A Builder Asked Me for a Line of Credit... Here's What I Told Him
- 3 days ago
- 7 min read
Welcome to Naomi's Notebook #005
Welcome to Naomi's Notebooks... where I take real deals, real numbers, and real lending decisions and show you exactly how I think as a lender. Sometimes I say yes. Sometimes I don't. Either way, there's always a lesson. If you're a builder or general contractor, this notebook is for you. One phone call about a builder line of credit turned into a much bigger conversation about working capital, cash flow, and one financing option that many contractors don't even know exists.
Evaluating a Builder Line of Credit
The Call
One afternoon a general contractor called me looking for a builder line of credit.
At first, that sounded like a pretty straightforward request.
His company was growing quickly. He had more than 250 homes under construction, plenty of work in the pipeline, and wasn't calling because business was slow. Quite the opposite. Business was booming!
The problem was cash flow.
At first, that might sound strange. How can a company building more than 250 homes run into cash flow issues?
The answer has nothing to do with profitability.
It has everything to do with ... timing!
Digging Deeper
One thing most people don't realize is that builders often become the bank without meaning to. The investor hires the builder, the builder hires the subcontractors, and those subcontractors expect to be paid as soon as the work is finished. The problem is the investor usually isn't paying the builder that same day. The builder submits an invoice, the investor requests a draw from their lender, the inspection gets scheduled, the draw gets approved, and eventually the funds are released. That entire process can take weeks. During that time, the subcontractors still expect to be paid, which means the builder is often using their own money to keep the project moving. The issue isn't profitability... it's cash flow. They're financing the gap between when the work is completed and when the money actually arrives.
My First Thought
When he asked about a builder line of credit, I completely understood why. If I were paying dozens of subcontractors every week while waiting 30 days to collect hundreds of thousands of dollars in invoices, I'd probably be asking the same question. The challenge is that true revolving working capital lines of credit for general contractors are extremely difficult to obtain, especially at the size this company needed. And there's a good reason why!
Unlike a retail business, builders don't have inventory sitting on shelves or equipment that's easy for a lender to collateralize. Their biggest asset is the money they're owed for work they've already completed. While that's certainly valuable, accounts receivable are much more difficult for a lender to finance than real estate because the invoices haven't been paid yet. Working capital lines do exist, but large revolving facilities for builders are relatively rare because the lender is taking risk on future collections rather than hard collateral.
Looking at the Problem Differently
After we talked through how his business operated, I realized he wasn't really asking for a line of credit. He was asking how to solve a cash flow problem. Those aren't always the same thing.
So, instead of focusing on how to get him approved for a revolving line of credit, I started asking a different question: Why does he need one in the first place? The answer became pretty obvious. He wasn't short on work, and he wasn't losing money. He had already earned the money. The problem was that he had to wait 30 days, or sometimes longer, to actually receive it.
That's when I introduced another option: Accounts Receivable Financing. You may have also heard it called invoice financing or factoring, but don't let the name scare you. It's simply a way for a business to turn completed work and unpaid invoices into immediate working capital instead of waiting for customers to pay.
Here's a simple example.
Let's say you've completed work for an investor and submit a $200,000 invoice with Net 30 payment terms. Rather than waiting a month to get paid, you assign that invoice to an accounts receivable financing company. Assuming they advance 85%, your company would receive $170,000 almost immediately. When the investor pays the invoice, the financing company deducts its fee and sends you the remaining balance.
The math looks like this:
Step | Amount | Explanation |
Invoice Issued | $200,000 | Work completed and invoiced to the investor |
Immediate Advance (85%) | +$170,000 | Funds wired to the builder within days |
Investor Pays Invoice | $200,000 | Payment sent directly to the financing company |
Financing Fee (2%) | −$4,000 | Cost of receiving funds early |
Remaining Reserve Released | +$26,000 | Balance returned after the invoice is paid |
Total Cash Received | $196,000 | Cost of accelerating payment: $4,000 |
For this example, the builder receives $170,000 immediately, allowing subcontractors to be paid without waiting for the investor's draw funds. Once the investor pays the invoice, the financing company deducts its fee and releases the remaining reserve. The builder ultimately receives $196,000 instead of $200,000, meaning the cost of accessing that cash early was $4,000, or 2% of the invoice.
Naomi's Take
One thing I've learned over the years is that growth is expensive. Ironically, cash flow problems usually don't show up when business is slow, they show up when business is booming. This builder has more than 250 homes under construction, which is an incredible position to be in, but the more homes you're building, the more subcontractors you're paying, and the more money gets tied up between completed work and unpaid invoices.
At a certain point, business owners have to make sure the business has enough working capital to keep everything moving. Payroll doesn't wait. Subcontractors don't wait. Suppliers don't wait. If you're constantly waiting on customers to acquire their draws or customer payments, eventually your own cash becomes the bottleneck.
So what's the solution? Sometimes that means a line of credit. Sometimes it means using the equity in real estate you already own. And sometimes, like this situation, it means finding a way to accelerate money you've already earned. Every business is different, which is why I never start with the loan product... I start by understanding how the business actually works.
Not sure what financing you need?
Perfect! Don't worry about trying to pick the right loan product, that's my job. Tell me about your project, what's working, and what's keeping you up at night. Together, we'll figure out the financing strategy that makes the most sense for your business. Whether you're looking for a builder line of credit, working capital, construction financing, or simply aren't sure where to start, I'd be happy to review your business and goals.
What is a builder line of credit?
A builder line of credit is a revolving source of financing that allows builders and general contractors to access working capital as needed. Many builders use these funds to cover payroll, subcontractor payments, materials, and other operating expenses while waiting for customer payments or construction draw funds.
Why is it so difficult for builders to get a line of credit?
Unlike traditional businesses, builders often don't have inventory or other assets that lenders can easily use as collateral. Much of a builder's value is tied up in completed work and unpaid invoices, making high-balance revolving lines of credit more difficult to obtain than loans secured by real estate.
What is accounts receivable financing?
Accounts receivable financing allows a business to receive cash based on unpaid customer invoices rather than waiting 30 to 60 days for payment. Instead of borrowing against real estate, you're accessing money you've already earned.
Is accounts receivable financing the same as factoring?
Essentially, yes. Accounts receivable financing (often called invoice financing or factoring) allows a business to turn unpaid invoices into immediate working capital instead of waiting 30, 45, or 60 days to get paid.
That said, not all factoring companies are the same, and this is where builders need to be careful. I've seen some companies charge excessive fees, lock businesses into long-term contracts, require minimum monthly volumes, or include termination penalties that can become very expensive. Others are much more flexible and are designed to grow with your business.
Before signing any agreement, I always recommend understanding exactly how the fees are calculated, whether there are minimum usage requirements, who is responsible if an invoice isn't paid, and whether you're entering into a long-term contract or a facility you can use only when you need it.
Should I use a builder line of credit or accounts receivable financing?
It depends on what you're trying to accomplish and what collateral you have available.
A traditional builder line of credit works best when you're building homes that you own and are on title to. In that situation, the real estate serves as collateral, making it much easier for a lender to approve a revolving line of credit or other real estate-backed financing.
If you're a general contractor building homes for someone else, it's a completely different story. You're not on title to the property, so there's no real estate for the lender to secure the loan against. In many cases, that makes obtaining a high-balance revolving builder line of credit extremely difficult.
That's where accounts receivable financing can make a lot more sense. Instead of borrowing against real estate, you're accessing cash tied up in completed work and unpaid invoices. If your biggest challenge is paying subcontractors while waiting for customers or construction draw funds, accounts receivable financing may be a more practical solution than a traditional builder line of credit.
How do builders improve cash flow while waiting for your client's construction draws?
There are several strategies, including accounts receivable financing, business lines of credit, equity-based financing, negotiating supplier payment terms, and managing construction draws efficiently. The best option depends on how your business operates and where the cash flow bottleneck exists.
Why do builders have cash flow problems even when they're profitable?
Because profitability and cash flow for builders aren't the same thing. A builder may have millions of dollars in signed contracts and completed work but still be waiting weeks for customer payments or lender draw funds. During that time, subcontractors, suppliers, and employees still need to be paid. That's why many growing construction companies look for working capital solutions even when their business is profitable.
