How do lenders underwrite a line of credit for a roofing contractor?

The roofing year

Few businesses have a working capital cycle as tied to the calendar. In most markets, roofing slows in winter, ramps in spring as weather allows tear-offs, and peaks in summer and fall, with hail and wind events adding work on top of whatever was already booked. Crews and subcontracted installers are paid weekly. Shingles, membrane, underlayment and flashing come from distributors on account. Customers pay at completion, or in stages on larger commercial jobs, or — on insurance work — whenever the insurer releases each payment.

The illustrative roofer below does a normal season with a storm in late summer. The line is sized to the storm-season peak, the method set out on sizing a working capital line, and it is back to zero by winter.

Two things in that table decide the line. The peak need is 850, well above the average. And at the peak, more than half the receivables are insurance claims — the category lenders are least willing to count. If a borrowing-base lender excludes them, eligible receivables at the peak are about 600 before any other cut, and even at the typical 80% to 90% advance they support only 480 to 540: a gap of more than 300 at exactly the moment the roofer needs the money. That gap is the central fact of roofing finance, and the rest of this page is about closing it.

Four kinds of roofing receivable

A lender's first question is what kind of roofing the company does, because each kind produces a different receivable. Most roofers do more than one, and presenting revenue and receivables by type is the single most useful thing a roofer can do for its file.

Residential retail work rarely strains a line: the job is short and the homeowner, or the homeowner's financing company, pays at completion. Commercial work behaves like any subcontracted construction and brings the familiar issues of pay applications, retainage and lien waivers, covered in more depth on lines of credit for general contractors. Insurance work is where roofing is unlike anything else.

Why insurance work is hard to lend against

On a typical homeowner claim, the insurer pays the actual cash value of the roof first — replacement cost less depreciation — and releases the withheld depreciation only after the work is complete and the final invoice is submitted. The homeowner owes the deductible. Items the adjuster missed are added through supplements, which the insurer may accept, reduce or refuse. Checks are often made out jointly to the homeowner and the mortgage company, and the mortgage company's endorsement can take weeks.

Every one of those features fails a standard eligibility test. The amount is not fixed until the supplement is settled. The contractor's contract is with the homeowner, who may never have intended to pay anything beyond the insurance proceeds and the deductible. The payment runs through a third party whose timing the roofer does not control. And several states have restricted the assignment of insurance benefits to contractors, limiting the roofer's direct claim on the insurer.

Lenders respond in one of three ways: exclude insurance receivables entirely, count only the approved and uncontested portion, or cap insurance receivables at a share of the base. Some roofers with mostly storm work turn to factoring instead, where a factor willing to take claim receivables buys them one at a time after its own verification; 116 lenders in Transparent's book write factoring. As the book of commercial and retail work grows, moving from factoring to a line of credit usually follows.

A roofer whose revenue is mostly storm work should expect a borrowing base smaller than its receivables suggest, and size its own cash reserves for the gap.

Distributor credit and the lien question

For many roofers, the largest source of financing is not a bank but the roofing distributor. Distributors extend trade terms by job or by account, sometimes take personal guarantees, and sometimes file UCC financing statements against the roofer's inventory or all assets. They also hold lien rights on the jobs their materials went into.

That matters when a bank line arrives. A lender taking a first lien on receivables needs to see what the distributors have filed, and a blanket lien from a supplier has to be released, narrowed to the materials it sold, or subordinated before the bank will fund. Roofers are often surprised to find a distributor filing they had forgotten; it is better found by the roofer than by the bank's lien search. The documents involved are explained on subordination agreements.

Distributor terms also move the size of the line. A roofer that pays distributors on time keeps its trade credit and needs less from the bank; a roofer that stretches its payables in the storm season risks being put on job-by-job credit or cash-on-delivery, which shifts the whole material bill onto the line at the worst moment.

Structuring the line for a seasonal business

Most roofing lines are one of two shapes. A seasonal line is available for the building season and expected to be repaid, or nearly so, by winter; banks often write it with an annual clean-up period during which the balance must be at zero. A revolving borrowing-base line suits larger commercial roofers with steady service revenue, where receivables exist all year.

Covenants are the usual bank set: debt service coverage, where conventional bank lenders commonly look for at least 1.25x; a minimum tangible net worth; and often a maximum leverage ratio. Lenders measure coverage on full-year results, so a roofer should expect questions about a storm year that flatters earnings. A lender will want to see how the business performs in an ordinary season, and will not size a permanent line on a single storm.

Roofers should also expect questions that other contractors are not asked: the volume of warranty claims and callbacks, how workmanship warranties are reserved for, whether installers are employees or subcontractors, and the workers' compensation and general liability record. Each is a potential claim on cash that ranks ahead of the lender in practice, if not in law.

What trips roofing contractors up

• Chasing a storm without the working capital for it. Crews, trucks and materials for a storm market are paid for weeks before the first insurance check clears.
• Sizing the line on the storm year. A line or a term loan sized on one exceptional season becomes a burden in an ordinary one.
• Unsettled supplements. A pile of disputed supplements looks like receivables and behaves like losses.
• Concentration. One property manager or general contractor providing a large share of commercial work runs into the common 20% to 25% concentration cap on any single customer.
• Cash advances in the ramp. Daily-debit advances taken in April are still pulling cash in August; see refinancing cash advances for contractors.

What lenders ask for

Transparent's line-of-credit checklist applies: the AR aging by customer with days outstanding, the AP aging (distributors included), the balance sheet, P&L and a year-to-date P&L, a debt schedule showing existing liens and UCC filings, and optionally an inventory report, bank statements and two to three years of business tax returns. Roofers should add a revenue split by type of work and an aging of insurance claims that shows, for each, what has been approved, what is in supplement, and what depreciation is still withheld.

Of Transparent's 1,800+ lenders, 235 write asset-based loans and lines, and their appetite for roofing differs mainly on insurance work and seasonality. Transparent builds the full lender package — financing model, lender presentation, blind teaser and underwriting memo — in a day once documents are in, so the lender sees an ordinary season and a storm season side by side. For buyers, the related page is financing a roofing company acquisition, and SBA's lending record for the trade is on SBA loans to roofing contractors.