What is a construction line of credit and how does it work?

The U.S. construction industry has been booming in the last couple of years. Though growth is forecasted to slow in 2026, it is expected to continue to grow at a rate of about 1.15%, according to a 2025 Q2 analysis from the Cumming Group. 

Challenges construction business owners are dealing with include tariffs, supply chain disruptions, high insurance rates, a long list of licensing and permit requirements, labor shortages, and expensive material and equipment costs. Any of these can lead to cash flow issues, which make it difficult to cover invoices on time, pay employees, and purchase the tools needed to succeed.

That's where a construction line of credit can be invaluable to home builders, general contractors and others in the construction business.

What is a construction line of credit?

If your business qualifies for a construction line of credit, it will be approved to borrow up to a certain amount – your credit limit. 

You will then access some or all of the line of credit as needed.

Some lines of credit require collateral, but unsecured lines of credit are also common. Unsecured loans carry higher risk for the lender and interest rates often reflect that risk.

How a construction line of credit works

A construction line of credit can be a flexible financial tool that adapts to your project needs. Here's an overview of how it works:

Step 1: Application and approval 

You apply for the credit limit you need. Lenders then review your financial profile, including factors like credit history, revenue, and time in business, to determine your credit limit. 

Step 2: Access funds 

Once approved, you can draw funds as needed — whether that's $5,000 for materials one week or $50,000 for equipment the next. (Up to your approved credit limit, of course.) You only pay interest on the amount you actually borrow. Some lenders require a draw fee for individual draws against the LOC. 

Step 3: Repayment 

There are a couple of common ways lines of credit must be repaid. 

• Interest only payments during a draw period. After that period, the loan must be repaid over a specific period of time. 
• A repayment period for the amount borrowed; often over six to twenty-four months,

Step 4: Borrow again

As you pay down your balance, that portion of your credit line often becomes available again. This revolving nature can make it ideal for ongoing construction projects with changing financial needs.

What is the difference between a line of credit and construction loan?

A construction loan offers a fixed loan amount, usually for a specific purpose (i.e. to finance a specific construction project). 

Your business may pay a fixed rate of interest on the loan, and payments are often fairly level for a period of time. 

Small business loans may offer repayment periods of up to 10 or 25 years for certain projects. 

A line of credit is a more flexible option. Your business will typically be able to draw from the line of credit as needed (up to your credit limit) and will only be charged interest on the outstanding balance. 

Payments will vary, depending on the outstanding balance. Some lines of credit require interest-only payments during a draw period; the balance will need to be repaid later which may mean higher payments and no additional access to the line of credit during that time.

Why contractors need a line of credit

Construction lines of credit and construction business loans may be used for a variety of business purposes, not just construction costs. Understanding why contractors need a line of credit helps you see how this financing tool can strengthen your business operations.

Bridge gaps in cash flow

Cash flow is a big challenge in the construction industry. And it’s even more of a challenge in recent years with costs rising quickly and significantly. 

A construction line of credit can fill the gap and ensure your business has enough cash to handle all of your expenses year round. It can be particularly beneficial if you're going through a slow sales cycle due to the weather, industry trends, or the economy.

Purchase materials and equipment

Construction equipment is expensive, to say the least. But you can’t build without it. 

A construction line of credit can be used to buy equipment at a discount until other financing can be lined up. Equipment loans and financing can also be a good choice here.

Cover payroll and hire staff

Your crew is the lifeline of your business. You can have the best equipment but if you don't have enough contractors or hire the wrong ones, things can go south quickly. In 2025 and 2026, some construction businesses are finding it even more difficult to find workers due to changes in immigration policy. Payroll costs may be rising. 

Ultimately, this type of financing can give you more flexibility in your business. You can spend more time getting work done, rather than trying to find financing or juggling expenses.

But keep in mind that a line of credit is borrowed money that you’ll have to pay back. Your goal should be to use borrowed funds for planned business needs with a clear repayment strategy.

Requirements for construction lines of credit

To qualify for a business line of credit for construction company needs, lenders will often consider the following factors:

Credit history

• A lender may check a prospective borrower's personal credit, business credit, or both.
• Some business credit scores analyze both personal and business credit data. The FICO® Small Business Scoring Service℠ (SBSS℠) is one example of a scoring model that can include both. 
• Don't be surprised if a personal credit check is required, especially for a newer or younger business. 
• If the lender or vendor reports to a business credit bureau, on-time payments may help build business credit.

Time in business

• New businesses (less than two years old) will have fewer options than more established ones, especially when it comes to traditional financing options like bank lines of credit. 
• A lender may be more flexible with time in business requirements if the business owner can demonstrate extensive industry experience.

Revenues

• A lender will want to verify business revenues to ensure the business has sufficient cash flow to repay the loan.
• You'll likely be asked to provide proof of monthly revenues by providing business bank statements, and/or copies of business tax returns. 
• The lender may analyze the businesses' financials, looking at metrics such as the debt service coverage ratio (DSCR) or debt to equity ratio

Collateral

• Lines of credit are often unsecured, which means collateral is not required or used to guarantee the loan.
• Some lenders, though, will use a UCC filing to protect collateral. 
• Lenders may also require a personal guarantee which makes the borrower personally liable for any unpaid debt. 
• Make sure you understand what types of guarantees or liens will be required.

Additional funding options for construction business

If a traditional line of credit isn't a good fit, or if your business doesn't qualify, consider these funding options:

SBA loans

The Small Business Administration (SBA) partners with banks and other lenders to help qualified small businesses get financing. If you opt for an SBA loan, benefits may include longer loan terms, interest rate caps, and low down payment requirements.

There are several types of SBA loans that may be used for working capital, equipment and real estate. (SBA loans for real estate have owner occupancy requirements.)

Two options worth checking out for your construction business: SBA 7(a) loans and SBA 504 loans. Eligibility and terms vary, and SBA loans involve additional underwriting and documentation.

Equipment financing

Equipment loans and leasing may help your business acquire the equipment you need to grow your construction business. Because the equipment serves as collateral, it may be more flexible than other types of traditional financing.

Business credit cards

A business credit card works like a personal credit card. You can spend as little or as much as you'd like up to your credit limit. You'll only pay interest on the amount you borrow. Most business credit cards come with cash back or points programs that can reward you for your spending.

Additionally, some of them offer generous 0% intro APR offers where you won't be charged interest if you pay back the balance before the intro period expires. 

Your personal credit scores may determine whether you qualify for a small business credit card: Many of them require good to excellent credit.

Supplier financing

The vendors and suppliers from which you buy materials may offer payment terms. Net-30 terms give you 30 days to pay, for example. This type of financing can be essential for cash flow. 

If your vendor reports your net-30 account to business credit bureaus, you can build your credit history by paying on time. 

The bottom line   

A construction line of credit or a general business line of credit can be a tool your construction bill relies on as much as the physical tools you use every day. You can use it to secure the capital you need to pay for equipment and materials, hire more contractors, or just manage cash flow.

If you decide to get a business line of credit, Nav can help you build business credit and find financing options for your business based on your business data. 

This content is for informational purposes only and is not legal, tax, or financial advice.

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