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Banking Relationships for Contractors

Document Type: Guide
Version: 1.0
Last Updated: February 2026
Distribute To: CFO, Controller, Owners

Purpose​

Provide guidance on managing banking relationships to support construction operations.

Why Banking Relationships Matter​

Contractors Need Banks For:​

  • Operating line of credit
  • Equipment financing
  • Real estate loans
  • Treasury management
  • Payment processing
  • Letters of credit

Construction is "Bankable" When:​

  • Strong financials
  • Good management
  • Solid backlog
  • Clean track record
  • Relationship established

Key Banking Products​

1. Operating Line of Credit​

Purpose: Bridge cash timing gaps

Typical Terms:

  • Revolving facility
  • 1-year term (renewable)
  • Based on AR/backlog
  • Variable rate (Prime + X%)
  • Secured by assets

Sizing:

  • 10-20% of revenue typical
  • Based on borrowing base
  • Subject to advance rates

2. Equipment Financing​

Options:

  • Term loans
  • Leases
  • Equipment line of credit

Typical Terms:

  • 3-7 year terms
  • Asset as collateral
  • Fixed or variable rate
  • Matches useful life

3. Real Estate Financing​

For:

  • Office/yard purchase
  • Building construction
  • Investment property

Typical Terms:

  • 10-25 year amortization
  • Fixed or variable rate
  • 75-80% LTV

4. Treasury Services​

Services:

  • Business checking
  • Lockbox/remote deposit
  • ACH/wire transfers
  • Positive pay (fraud prevention)
  • Online banking
  • Payroll processing

What Banks Look For​

The 5 C's of Credit:​

FactorWhat They Evaluate
CharacterManagement integrity, reputation, track record
CapacityAbility to repay from cash flow
CapitalOwner equity, net worth
CollateralAssets to secure loan
ConditionsEconomic environment, industry outlook

Construction-Specific Factors:​

FactorStrongWeak
Backlog12+ monthsunder 6 months
ProfitabilityConsistent marginsVolatile/losses
Working capitalAdequate for sizeStrained
Over-billingModerateExcessive
AR agingCurrentAged
BondingStrong relationshipLimited/none
ManagementExperienced teamKey person risk

Borrowing Base​

Typical Structure:​

Eligible AR (< 90 days):       $__________
× Advance rate (80%):          $__________

Eligible Under-billings:       $__________
× Advance rate (50%):          $__________

Total Borrowing Base:          $__________
Less: Outstanding balance:     $__________
= Available to borrow:         $__________

Ineligible Items:​

  • AR > 90 days
  • Retainage (sometimes)
  • Intercompany receivables
  • Disputed amounts
  • Concentration excess

Loan Covenants​

Common Covenants:​

CovenantTypical Requirement
Minimum working capital$X or ratio
Minimum net worth$X or ratio
Maximum debt to equity3:1 or 4:1
Minimum current ratio1.1 or 1.2
Maximum over-billing %15-20%

Reporting Requirements:​

  • Monthly/quarterly financials
  • Borrowing base certificate
  • AR aging
  • WIP report
  • Backlog report
  • Compliance certificate

Covenant Violations:​

  • Notify bank immediately
  • Explain circumstances
  • Propose remedy
  • Request waiver if needed
  • Don't wait for them to find out

Building the Relationship​

Best Practices:​

Communication:

  • Meet quarterly (minimum)
  • Share good and bad news
  • Provide timely financials
  • No surprises

Transparency:

  • Explain your business
  • Help them understand construction
  • Invite site visits
  • Introduce key people

Professionalism:

  • Clean financials (CPA reviewed/audited)
  • Organized documentation
  • Prompt responses
  • Honor commitments

Selecting a Bank​

Considerations:​

FactorQuestions
Construction experienceDo they understand contractors?
PortfolioDo they have other construction clients?
RelationshipWill you have a dedicated banker?
ProductsDo they offer what you need?
PricingCompetitive rates and fees?
FlexibilityWill they work with you in tough times?
StabilityWill they be here in 5 years?

Banks Active in Construction:​

  • Community banks (often best relationships)
  • Regional banks
  • National banks (construction groups)
  • Credit unions (sometimes)

Annual Bank Meeting​

Agenda:​

  1. Company Update

    • Prior year results
    • Current year progress
    • Key wins/achievements

  2. Financial Review

    • Financial statements
    • WIP summary
    • Backlog report

  3. Market Outlook

    • Industry conditions
    • Pipeline
    • Growth plans

  4. Relationship Review

    • Line utilization
    • Covenant compliance
    • Service satisfaction

  5. Future Needs

    • Anticipated requirements
    • Line increase requests
    • Equipment needs

When Things Get Tough​

If Facing Challenges:​

DO:

  • Communicate early
  • Be honest about situation
  • Present a plan
  • Show you're taking action
  • Request what you need

DON'T:

  • Hide problems
  • Miss reporting deadlines
  • Violate covenants silently
  • Wait for them to call
  • Burn the relationship

Banks Prefer:​

  • Proactive communication
  • Realistic assessments
  • Concrete plans
  • Management accountability
  • Demonstrated progress
  • Cash Flow Management
  • Financial Statements
  • WIP Reporting
  • Bonding Guide

Template provided by support.construction. Strong banking relationships support growth.

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