I met with our banker today to discuss renewal of our credit line and was told that progress billings would be excluded from Accounts Receivable used as collateral for the line of credit.  He said that is the policy for all the banks where he has worked.  I have never had to exclude progress billings previously.  The only thing we exclude are receivables over ninety days.

I welcome any comments regarding your experience with using Accounts Receivable as collateral for a line of credit.

We are not a large company, but we are growing.  As a bit of good news to report...we were able to switch from an SBA line of credit, which maxes out at $350,000 to a conventionally financed higher line of credit just last month!

Only the A/R 90 days and under was counted, but they looked at the business and ownership's financials in depth.  As both Douglas and Chris mentioned,  we had to help our business banker in her presentation of our application to the underwriter.  Our banker outlined what the underwriter's concerns would be based on being in construction, and I wrote a seven-page response to those concerns. 

The critical issues for construction (SIC 1522) were 1) highly cyclical demand, based on US Economy, and 2) uneven revenue/expenses, based on periodic payments with retainage and increasing material costs.  Beyond that, they took hard looks at both company and ownership financial ratios (liquidity, leverage, debt service coverage) as well as the ownership's credit scores.

In our experience, our business banker made all the difference.  She's been in banking for over 23 years and knew how to work with the underwriters...not just acting as a messenger for them.

Best of luck!

Many banks currently have no appetite for construction lending including lines of credit to contractors and construction-related businesses. They consider our industry high-risk especially since federal regulators are requiring banks to automatically classify commercial real estate loans as "troubled assets."

It's going to be difficult in our industry for the next two years, especially when it comes to banking relationships. Now isn't a great time to be looking for a bank because the rules have changed. My feeling is that the best thing to do is work with your existing bank and help them better understand your business. That being said, you may not have a choice if your banker refuses to work with you and your firm.

Forecasting trends, backlog reports, customer analysis, and timely financial statements with WIP schedules will provide greater comfort to your lender. Audited financial statements would ultimately provide a greater degree of comfort as well. Bankers are deluged with regulations and red tape as a result of the financial crisis and the fallout from TARP. I believe you have to make it "easy" for them right now. Good ratios, responsible financial management, and timely reporting will be your best weapons.

Also, it doesn't hurt to throw them a bone from your owner(s) like compensating balances, investments, etal. As one contributor already wrote here about their bank line of credit - "...good thing we don't need it right now..."

Good luck, and keep us posted on your success.

Your banker sounds like someone who has little experience in financing contractors.  Exclusion of progress billing in A/R would be consistant with a manufacturing firm not a contactor.  Since most GCs use a percentage-of-completion method and may have multi-year contracts, there wouldn't be any A/R to lend against.  Typical exclusions would include retainage, accounts over 90-days, concentrations over 20% etc.

As a banker that specializes in contractor lending, I would spend more time analyzing your WIP to determine the likelyhood of repayment. Areas of concern would be the profit fade on a job-by-job basis, any costs-in-excess over 5% of the billed amount, and number of days of backlog remaining.

Fred,

First a question. Has your banker ever excluded your progress billings from their collateral basis calculations before this year? 

If not, then you are experiencing, first hand, the fallout from the banking fisaco. I have seen banks exclude certain A/R accounts from the collateral base on a case by case basis (particularly retention payments that are contingent on resolution of certain disputes and punch list work) but have never seen the whoelsale exclusion of all A/R.

A couple of thoughts.

Do you perform work for a local, regional, federal government entity? If so, there is a strong arguement that could be made about the safety and security of those receivables and, in my opinion, should be allowed in figuring your collateral base.

Second, have you prepared an analysis of the reliability of A/R payments by client? If not, you might want to do so and see what patterns exist. If your clients demonstrate a consistent payment history with few,if any, adjustments to their invoices, there is a strong arguement to be made for inclusion.

My point is that bankers are now requiring 10 pounds of flesh where, two years ago, they required only 1.

You need to demonstrate and convincce your banker that you have an airtight hold on your A/R program and I think they will begin to soften their stance a little and allow a certain % of current A/R to be included in the collateral calcualtions.

Just don't give up. Keep me posted on your progress.

 Chris