Lenders size an HVAC or plumbing contractor's line by its mix of work. Service-heavy companies are mostly paid at the job, so their receivables are small and a bank usually sizes the line on cash flow. Contractors doing commercial or new-construction work can borrow against receivables, but lenders exclude retainage, discount or exclude progress billings and read the work-in-progress schedule closely; bonded jobs add a surety with its own claim on contract money. Either way, size the line to the seasonal peak, including pre-season equipment buys, and keep trucks and equipment on separate term debt.
- Service and replacement work
- Paid at the job; usually a bank line sized on cash flow
- Commercial and construction work
- Receivables-based, but retainage excluded and progress billings discounted or excluded
- Document lenders read first
- The work-in-progress schedule
- Seasonal peak
- Summer cooling and winter heating, plus pre-season equipment buys
- Keep off the line
- Trucks, vans and equipment: finance them on term
Three businesses under one roof
Most HVAC and plumbing companies of any size do some mix of residential service, replacement installs, maintenance agreements and commercial or new-construction work. Each gets paid differently, and a lender sizing a line starts by splitting the revenue that way.
| Revenue line | How the customer pays | Receivable left behind | What it means for a line |
|---|---|---|---|
| Residential service and repair | At the job, by card, check or consumer financing | Very little | Supports cash flow, not a borrowing base |
| Residential replacement installs | At completion, often through a consumer financing program that pays the contractor directly | A short receivable from the finance company | Small; counts if the finance company pays promptly |
| Maintenance agreements | In advance, annually or monthly | None; prepayments are a liability until the work is done | Recurring revenue that cash-flow lenders value, and a customer base buyers pay for |
| Commercial service for property managers and facilities | Invoiced on terms | Ordinary trade receivables | Eligible, subject to the usual aging and concentration limits |
| New construction and tenant improvement | Monthly progress billing, with retainage held back until completion | Progress billings and retainage | Limited: retainage excluded, progress billings discounted or excluded |
A service-heavy company collects most of its revenue within days, so its line is really a cash-flow line: a bank sizes it on earnings and tests debt service coverage, where conventional bank lenders commonly look for at least 1.25x. A construction-heavy contractor has large receivables but weak ones, and needs a lender that understands contract billing. Many companies sit in between, and the right structure depends on which side carries the working capital. The general comparison is in asset-based vs cash-flow lines.
Why construction receivables shrink a borrowing base
A receivable from a general contractor on a job still under way is a weaker asset than an invoice for a finished service call, for reasons that have nothing to do with the contractor's credit.
- Retainage, the portion of each progress payment the general contractor holds until the job is finished and accepted, is usually excluded entirely. It may not be paid for many months, and it depends on the work being completed.
- Progress billings on unfinished jobs can be offset. If the contractor fails mid-job, the general contractor will charge the cost of finishing the work against whatever it owes. Lenders either exclude progress billings or advance on them at a lower rate than ordinary receivables.
- Pay-when-paid clauses tie the subcontractor's payment to the owner paying the general contractor, which lengthens and loosens the timing.
- Bonded jobs bring in a surety, which, if it has to step in, has rights to the money due on those contracts that can come ahead of a lender. Lenders to bonded contractors usually want an agreement with the surety, or they discount the bonded receivables.
- Lien rights protect the contractor's claim to be paid, but they do not help a lender collect in a hurry.
Some lenders specialize in contractors and are more comfortable with progress billings, especially on jobs for strong general contractors and public owners. For work that is signed but not yet billed, see borrowing against a signed contract or backlog and the contract version of SBA CAPLines.
The work-in-progress schedule
For any contractor doing fixed-price work, the document a lender reads first is the work-in-progress schedule: every open job with its contract value, estimated total cost, cost to date, billings to date and the resulting overbilling or underbilling. It shows whether the company is making the money its income statement says it is.
| Job A | Job B | |
|---|---|---|
| Contract value | 1,000 | 600 |
| Estimated total cost | 800 | 500 |
| Cost to date | 440 | 350 |
| Complete, by cost | 55 of every 100 | 70 of every 100 |
| Revenue earned to date | 550 | 420 |
| Billed to date | 650 | 300 |
| Overbilled (underbilled) | 100 overbilled | (120) underbilled |
| Collected to date | 400 | 230 |
| Owed by the general contractor | 250, of which 65 is retainage | 70, of which 30 is retainage |
Job A is ahead on billing. That cash is welcome, but it is owed back in work: the company has collected for work it has not yet done, and if the remaining cost runs over the estimate the job loses money. Job B is behind: the company has spent money it has not billed. A few underbillings are timing. Underbillings that grow quarter after quarter usually mean a job running over budget, with the loss not yet recognized, and it is one of the first warning signs lenders look for in a contractor's file.
If your WIP schedule and your financial statements do not tie, fix that before a lender sees either. It is the first thing a contractor lender checks.
Seasons, and the pre-season buy
HVAC work follows the weather: cooling demand peaks in summer and heating in winter, with slower shoulder months between. Plumbing is steadier, though new-construction plumbing follows the building season. The cash need does not peak when revenue does. It peaks before and early in the busy season, when the company is buying equipment and parts ahead of demand, holding technicians through the slow months so they are there for the rush, and waiting on commercial receivables from the first busy weeks.
Equipment manufacturers and distributors often offer pre-season programs that let a contractor take stock early and pay later. They help, but they add payables that fall due in the busy season. A line sized to average usage runs short at exactly that point. See how a seasonal line works and sizing a working capital line.
Many bank lines require an annual clean-up period, when the balance must fall to zero or close to it for a set stretch. A contractor whose line is funding permanent working capital, rather than the seasonal swing, cannot meet it, and the permanent part belongs in term debt.
Trucks, equipment and the lien picture
A service company's fleet of vans is its largest fixed asset, and it is almost always financed or leased unit by unit. The line lender's blanket lien carves those units out, and the van payments count in the fixed charges the line lender tests. Parts and equipment on the vans are rarely counted in a borrowing base; stock in a warehouse may be, at the modest values inventory gets, up to 85% of net orderly liquidation value or roughly half of cost.
Before a new line closes, the lender searches existing lien filings, and contractors often find a supplier, an equipment lessor or a cash advance company with a filing on all assets. Each has to be released or subordinated. See blanket liens and a new line and equipment loans alongside senior debt.
Covenants, reporting and the surety
- Annual financial statements, reviewed or audited once the company reaches a size where lenders or sureties require it. See audited vs reviewed vs compiled financials.
- A WIP schedule quarterly or monthly for contractors with fixed-price work, and an AR aging that separates retainage.
- A debt service or fixed charge coverage covenant, and often a minimum tangible net worth.
- Annual renewal on many bank lines; see line of credit renewal.
If you bond work, your surety reads your line as closely as your lender does. Sureties set bonding capacity partly on working capital and net worth, and they look at whether the line is committed and when it matures. Borrowing on the line to cover a losing job reduces both, and shows up in both relationships at once.
What trips HVAC and plumbing contractors up
- One bad fixed-price job, visible first as growing underbillings.
- Moving into commercial or new construction without the equity to carry retainage and slower collections.
- Spending maintenance agreement prepayments as if they were earned; the work is still owed.
- Trucks bought from the line, leaving it permanently drawn going into the season.
- Merchant cash advances taken against card receipts in a slow month, which lien the same collateral and drain daily cash. See refinancing cash advances for HVAC and plumbing companies.
- Distributions taken after a strong summer that leave nothing for the slow months.
Preparing the file
Transparent's line of credit checklist: an AR aging by customer with days outstanding; an AP aging; the balance sheet and P&L; a year-to-date P&L through last month-end; a debt schedule showing existing liens; an inventory report if warehouse stock will be in the borrowing base; and, if available, bank statements and two to three years of business tax returns. For a contractor, add the WIP schedule, a backlog list, the number of maintenance agreements and how many renew, and bonding details if you bond work.
Transparent builds the lender package from those documents in a day, charges nothing before a loan closes, and places lines with the 235 lenders in its book that write asset-based loans and lines. Owners weighing a purchase of another shop should read financing an HVAC or plumbing company acquisition; the SBA's record for this industry is on SBA loans for plumbing and HVAC contractors.
Common questions
- Can a residential HVAC service company get a line of credit with few receivables?
- Yes, but it will usually be sized on cash flow rather than collateral. A bank looks at earnings, debt service coverage and the steadiness of revenue; recurring maintenance agreements help. The line is typically smaller relative to sales than an asset-based line, because there is little to borrow against.
- Will a lender advance against retainage?
- Usually not. Retainage is paid only when the job is finished and accepted, often months later, and the general contractor can offset it against problems. Most lenders exclude it from the borrowing base entirely.
- What is an underbilling, and why does my lender care?
- An underbilling is cost you have incurred on a job but not yet billed. Some are timing. Underbillings that keep growing often mean a job is running over budget with the loss not yet on the books, which is why lenders read the WIP schedule before the income statement.
- Should I finance my service vans on the line?
- No. Vans and equipment last for years and belong on term financing or leases. A line used to buy vehicles stays drawn and cannot cover the pre-season equipment buy or a slow month.
- Does bonding affect my line of credit?
- Yes. On bonded jobs the surety can have rights to contract money ahead of a lender, so lenders often discount bonded receivables or ask for an agreement with the surety. The surety, in turn, looks at your line when setting bonding capacity.