SBA Loan or Line of Credit: Financing Your Contracting Business

Before comparing rates, write down what the money is actually bridging. A mobilization gap, buying materials and paying the first two weeks of labor before the first progress payment clears, closes in weeks. A retainage gap, for example the 5 to 10 percent a developer might withhold until closeout, closes only once the project wraps up, which can be months out. A growth gap, a second crew, a new yard, a fleet purchase, doesn't close on its own; it needs to be repaid out of future margin over years.

A line of credit is the right tool for the first two because you only pay interest while the money is actually out, and you repay it the moment the pay application clears. An SBA term loan is the right tool for the third because it spreads a large, permanent purchase across years you don't want sitting on a revolving balance.

Match the gap to the tool in this order:

1. Write down what the money is bridging before you compare any rates, because the type of gap decides the product.
2. If it is a mobilization gap, meaning materials and the first two weeks of labor before the first progress payment, use a line of credit, since it closes in weeks.
3. If it is a retainage gap that only closes at project closeout, months away, a line of credit still fits because you pay interest only while money is out.
4. If it is a growth gap such as a second crew, a yard or a fleet, use an SBA term loan and repay it from future margin over years.

A bank or online lender sets a credit limit against your revenue and receivables, and you draw against it as jobs mobilize. Pricing is usually quoted as prime plus a spread, and the prime rate that spread sits on top of currently runs at 6.75 percent¹; bonding history, time in business, and balance sheet strength all move a specific contractor's spread up or down from there.

The advantage isn't the rate, it's the structure: draw against the line when a job mobilizes, then repay it the moment the progress payment clears, so you pay interest for the weeks the money was actually out, not for years you didn't need it.

SBA 7(a) loans exist for exactly the growth gap: buying a second excavator, financing a yard purchase, or acquiring a smaller trade contractor to add a service line. SBA 7(a) rates are capped by loan size, from 13.25 percent on the smallest loans down to 9.75 percent on loans over $350,000², with terms that stretch out for years instead of revolving month to month.

The SBA's CAPLines product is worth knowing about separately: it's a revolving structure guaranteed by the SBA, built specifically for contractors financing a single, seasonal, or short-term contract. If your bank offers it, it can undercut a standard line of credit's pricing while keeping the draw-and-repay mechanics you actually need.

Your surety looks at working capital, current assets minus current liabilities, when they set your bonding line. A revolving draw sits as a current liability against current assets, so heavy utilization right before a bonding review can shrink your capacity at the exact moment you need it. A term loan's long-term portion doesn't count against current liabilities the same way, so financing a truck purchase with an SBA loan instead of drawing down your line preserves bonding room.

This matters more the longer your receivables sit outstanding. Small businesses nationally take an average of 28.8 days to get paid³. In the engineering and construction sector, payables run close to 36 days⁴, so the working-capital math your surety runs is already tight before you add a maxed-out credit line to it.

Say you win a $250,000 tenant-improvement job where materials and the first payroll run cost $40,000, due before you can even submit a pay application, an application that won't clear for another five weeks: draw that $40,000 on your line at mobilization, repay it in full the day the payment lands, and your actual cost is a few hundred dollars of interest rather than a five-year commitment.

Now say instead you need $180,000 to outfit a second crew so you can bid two jobs at once, which isn't a five-week problem but a five-year one: financing it on a revolving line means the balance never fully pays down between jobs, while an SBA term loan matches the repayment schedule to the equipment's useful life instead.

The most common mistake is using a line of credit as permanent debt: drawing it once for a truck and never paying it back down, so it quietly becomes a five-year loan priced like a 30-day one. The second is applying for SBA financing only after a cash crunch has already started, when underwriting takes weeks you don't have. The third is ignoring CAPLines because your bank doesn't mention them by name; ask specifically, since a generalist loan officer may default you to a standard line without checking.

The fix for all three is the same: match the instrument to the calendar of the gap before you sign anything, and revisit the mix every time your backlog or bonding review changes.