Banking Relationships for Contractors
Document Type: Guide
Version: 1.0
Last Updated: February 2026
Distribute To: Owners, CFO, Controllers
Purpose
Establish best practices for building and maintaining banking relationships that support construction operations.
Why Banking Relationships Matter
Construction Banking Needs:
- Operating accounts
- Line of credit
- Equipment financing
- Real estate loans
- Treasury services
- Bonding support letters
Relationship Benefits:
- Better terms
- Faster approvals
- Flexibility when needed
- Industry understanding
- Problem-solving support
Choosing a Bank
Look For:
| Factor | Importance |
|---|---|
| Construction experience | Critical |
| Relationship banker | High |
| Local decision-making | High |
| Product offerings | High |
| Pricing | Medium |
| Technology | Medium |
| Branch convenience | Low |
Construction-Friendly Banks:
- Community/regional banks often best
- Construction lending specialists
- Understand WIP and backlog
- Know how to read contractor financials
Questions to Ask:
- How many construction clients?
- Who will be my contact?
- Where are credit decisions made?
- What reporting do you require?
- How do you handle problems?
Line of Credit
Why You Need One:
- Bridge cash flow timing gaps
- Handle seasonal fluctuations
- Fund growth
- Emergency reserves
- Bonding company comfort
Typical Terms:
| Term | Construction Standard |
|---|---|
| Amount | 10-20% of revenue |
| Rate | Prime + 0.5% to 2% |
| Term | 1-2 years, renewable |
| Security | AR, equipment, personal guarantee |
| Covenants | Financial ratios |
Borrowing Base:
Most construction LOCs are formula-based:
Eligible AR (< 90 days, excluding retention): $________
× Advance Rate (typically 80%): × 0.80
= Borrowing Availability: $________
Less: Outstanding balance: $________
= Available to Draw: $________
Getting Approved:
- Strong financials (profitable, positive equity)
- Good backlog
- Diversified customer base
- Experienced management
- Reasonable leverage
- Clean credit history
Bank Reporting Requirements
Typical Requirements:
| Report | Frequency | Content |
|---|---|---|
| Financial statements | Quarterly/Annual | P&L, Balance Sheet |
| WIP schedule | Quarterly | All projects |
| Backlog report | Quarterly | Work on hand |
| AR aging | Monthly | Customer detail |
| Borrowing base | Monthly | If LOC |
| Compliance certificate | Quarterly | Covenant calculations |
Annual:
- Audited or reviewed financials
- Tax returns
- Personal financial statements (guarantors)
- Insurance certificates
Financial Covenants
Common Covenants:
| Covenant | Typical Requirement |
|---|---|
| Minimum working capital | $X or % of revenue |
| Current ratio | > 1.1 to 1.25 |
| Debt to equity | < 3.0 to 4.0 |
| Debt service coverage | > 1.1 to 1.25 |
| Minimum net worth | $X or maintain |
| Maximum leverage | Defined level |
Covenant Monitoring:
- Calculate monthly (internally)
- Identify issues early
- Communicate proactively
- Request waivers if needed
If Covenant Violation:
- Inform bank immediately
- Explain circumstances
- Provide plan to cure
- Request waiver/amendment
- Document agreement
Relationship Management
Your Banker Should Know:
- Your business model
- Key projects
- Management team
- Growth plans
- Challenges you face
- Industry conditions
Communication Cadence:
| Type | Frequency |
|---|---|
| Financial reporting | Per agreement |
| Status calls | Quarterly minimum |
| In-person meetings | Semi-annually |
| Site visits | Annually |
| Issue communication | As needed |
Best Practices:
- No surprises
- Proactive communication
- Honest about challenges
- Share good news too
- Build personal relationship
Equipment Financing
Options:
| Option | Pros | Cons |
|---|---|---|
| Bank loan | Lower rate | Collateral required |
| Manufacturer financing | Easy approval | May cost more |
| Lease | Off balance sheet | Total cost higher |
| Cash purchase | No interest | Uses cash |
Financing vs. Leasing:
- Consider cash flow impact
- Tax implications
- Balance sheet effect
- Equipment residual value
- Flexibility needs
Treasury Services
Useful Services:
| Service | Purpose |
|---|---|
| Remote deposit | Deposit checks electronically |
| ACH origination | Pay vendors/payroll electronically |
| Positive pay | Fraud protection |
| Lock box | Accelerate collections |
| Zero balance accounts | Cash concentration |
| Online banking | Account management |
Cash Management:
- Centralize accounts
- Automate where possible
- Optimize float
- Protect against fraud
Multiple Bank Relationships
Reasons for Multiple:
- Capacity (large LOC need)
- Diversification
- Competitive pressure
- Geographic coverage
Managing Multiple:
- Primary relationship for most needs
- Secondary for specific purposes
- Keep both informed
- Don't play games
Problem Situations
If Bank Becomes Concerned:
Don't:
- Avoid communication
- Provide incomplete information
- Make promises you can't keep
- Be defensive
Do:
- Communicate proactively
- Provide full picture
- Present recovery plan
- Update regularly
- Deliver on commitments
If You Need to Change Banks:
- Don't burn bridges
- Plan transition carefully
- Ensure new facility in place
- Manage timing
Related Documents
- Cash Flow Management
- Financial Reporting
- Bonding Guide
- WIP Reporting
Template provided by support.construction. Strong banking relationships provide stability and flexibility.