What Banks Actually Look For in Construction Company Financials
- Cost Construction Accounting
- 3 days ago
- 6 min read
You've built a profitable construction business with steady projects and a solid reputation. But when you apply for a business loan or line of credit, the bank turns you down or offers terms that don't make sense. "Your financials don't support this loan amount."
It's frustrating because you know your business is strong. The problem isn't your business, it's that banks evaluate construction companies differently than other industries. The project-based nature of construction, combined with cash flow volatility and high upfront costs, makes lenders nervous.
This article takes you inside the lender's evaluation process. We'll show you exactly which financial documents banks scrutinize, what ratios they calculate, and which red flags trigger automatic rejections.
Why Construction Financials Face Extra Scrutiny
Banks treat construction lending as higher risk for clear reasons:
Project-based revenue creates uncertainty. Unlike businesses with predictable monthly income, construction revenue is lumpy. You might land a $500,000 project one month and nothing the next quarter. This volatility makes lenders question your ability to make consistent loan payments.
Cash flow timing challenges are built into the business model. You pay for materials upfront, cover weekly payroll, and wait 30-90 days (or longer) for client payments. Even profitable projects create cash crunches. Banks understand this risk.
The industry has high failure rates. Cost overruns, client disputes, weather delays, and subcontractor problems can quickly sink even established companies. Lenders have seen too many construction loans default.
Understanding this context helps you prepare the right financial documentation. Let's examine what banks actually look for.
The 5 Critical Documents Banks Examine
1. Balance Sheet: Your Financial Foundation
Your balance sheet reveals financial stability and net worth. Banks focus on specific metrics:
Current Ratio (Current Assets ÷ Current Liabilities) |
Banks want to see at least 1.25:1 for construction companies. This means $1.25 in current assets for every $1.00 in current liabilities. Below 1.0:1 is a major red flag, you can't cover short-term obligations.
Working Capital Position:Â Working capital (current assets minus current liabilities) shows whether you can fund daily operations without borrowing. Banks typically want positive working capital equal to at least 10-15% of annual revenue.
Debt-to-Equity Ratio:Â Most banks want debt-to-equity below 3:1 for construction companies. Higher ratios suggest you're overleveraged.
Red Flags:
Negative working capital
Current ratio below 1.0:1
"Due from Owner" accounts inflating assets
Large amounts of aged receivables (over 90 days)
2. Profit & Loss Statement: Beyond the Bottom Line
Banks dig deeper than net profit to assess sustainability.
Gross Profit Margins:Â Lenders expect 20-35% for general contractors and 25-40% for specialty subcontractors. Margins below 15% signal pricing or cost control problems. More importantly, banks look for consistency wildly fluctuating margins indicate estimating issues.
Overhead Percentage:Â Healthy construction companies typically run 10-20% overhead as a percentage of revenue. Higher percentages reduce your ability to absorb project setbacks.
Revenue Concentration:Â If one client represents more than 30% of annual revenue, banks see concentration risk. Losing that client could cripple cash flow.
Red Flags:
Gross margins below industry standards
Increasing overhead as percentage of revenue
Frequent job write-offs or warranty expenses
Owner distributions exceeding net profit
3. Work-in-Progress (WIP) Report: The Most Important Construction Document
This is critical:Â The WIP report is the single most important document for construction lending. A well-maintained WIP report can get you approved even with marginal other financials. A missing or messy WIP report will get you rejected even with strong profits.
What Is a WIP Report? A WIP report shows the financial status of all active projects, tracking contract value, costs incurred, estimated costs to complete, percentage of completion, and over-billings or under-billings.
Why Lenders Demand It Your P&L might show $2 million in revenue and $200,000 profit. But if your WIP reveals you've overbilled projects by $300,000 (collected money for work not yet completed), your "profit" is an illusion. When those projects finish, you'll owe money back or complete work already paid for.
What Banks Scrutinize:
Over-Billing Positions Significant over-billings (more than 10% of contract value) concern lenders. It suggests cash flow problems, you're front-loading invoices to cover expenses rather than billing based on actual work completed.
Estimated Cost to Complete Accuracy Banks compare your "estimated costs to complete" across multiple WIP reports over time. Consistently underestimating costs signals poor project management.
Aged Projects Projects dragging on months beyond original timelines suggest scope creep, client disputes, or subcontractor issues all of which often end in losses.
Red Flags:
No WIP report available (automatic rejection for many lenders)
Inconsistent or quarterly WIP reports (should be monthly)
Large over-billings across multiple projects
Negative gross profit margins on active projects
Missing projects or incomplete data
4. Cash Flow Statement: Proving Repayment Ability
Cash flow statements show how money actually moves through your business not accounting profits, but real dollars in and out.
Operating Cash Flow:Â Banks want positive operating cash flow that covers debt service. They calculate a debt service coverage ratio (DSCR) by dividing operating cash flow by annual debt payments. Most require DSCR of at least 1.25:1.
Accounts Receivable Aging:Â Lenders examine collection speed. Industry standard is 30-60 days. If your average stretches to 75-90 days, banks worry about your ability to generate cash for loan payments.
The 90-Day A/R Death Sentence:Â Critical threshold: if more than 15-20% of receivables are over 90 days old, many banks automatically decline applications. Aged receivables suggest client disputes or potential uncollectible accounts.
Red Flags:
Negative operating cash flow for multiple periods
Increasing receivables with stagnant revenue
Heavy reliance on financing to fund operations
Minimal cash reserves (less than 30 days operating expenses)
5. Job Cost Reports: Proving Cost Control
Job cost reports break down actual costs by project phase and compare them to estimates. Banks want evidence you can accurately estimate and control costs.
Budget vs. Actual Variance:Â Significant variances (more than 15-20%) between estimated and actual costs suggest poor estimating or change order problems.
Labor Burden Tracking:Â Sophisticated construction companies track true labor costs including taxes, insurance, and benefits not just wages. Complete tracking signals financial maturity to lenders.
Red Flags:
No job costing system in place
Frequent cost overruns with no corrective action
Missing phases or incomplete tracking
The Deal-Breakers That Get Applications Rejected
Certain situations result in automatic loan denial:
Commingled Personal and Business Finances:Â Using your business account for personal expenses (or vice versa) signals poor financial discipline and makes true business assessment impossible.
Missing or Late Financial Statements:Â Can't produce current statements (within 60-90 days)? Banks assume disorganized bookkeeping. Late tax returns (more than one year behind) also raise major red flags.
Tax Liens, Judgments, or Legal Issues:Â Outstanding liens or pending litigation create legal uncertainty most banks won't touch.
Negative Working Capital:Â If current liabilities exceed current assets, you're technically insolvent. Banks won't lend unless you inject owner equity to correct this.
How to Make Your Financials Bank-Ready
Establish Monthly Financial Close Process:Â Close books monthly with updated balance sheet, P&L, cash flow statement, WIP report, and A/R aging. Monthly closes catch problems early and demonstrate financial discipline.
Maintain Real-Time WIP Reports:Â Update WIP monthly at minimum. Track percentage complete based on actual costs, not guesswork. Compare estimated to actual costs and adjust projections when variances appear.
Clean Up Your Chart of Accounts:Â Banks want professional charts separating direct job costs from overhead, different revenue types, and short-term from long-term debt. Avoid catch-all "miscellaneous" accounts.
Implement Accurate Job Costing:Â Every project needs detailed job cost tracking by phase, comparing costs to estimates weekly or bi-weekly, not at project completion.
Build Cash Reserves:Â Banks favor companies with 60-90 days operating expenses in cash reserves. This buffer demonstrates you can weather payment delays without defaulting.
Get Professional Financial Statement Preparation:Â Self-prepared financials often contain errors or use non-standard methods that confuse lenders. Professional bookkeeping ensures GAAP-compliant statements that present your position clearly.
Separate Personal and Business Finances Completely:Â Open dedicated business accounts. Pay yourself a reasonable salary instead of irregular draws. Document owner loans with formal promissory notes.
What Strong Financials Get You
Beyond loan approval, organized financial statements deliver tangible benefits:
Better Interest Rates:Â Strong financials can reduce rates by 1-2 percentage points saving $10,000-$15,000 over five years on a $250,000 loan.
Higher Credit Limits:Â Confident banks approve larger loans and lines of credit, giving you flexibility for bigger projects.
Bonding Capacity:Â Surety companies use the same analysis as banks. Strong WIP reports and working capital unlock bonding for projects requiring performance bonds.
Negotiating Leverage:Â Strong financials let you shop for best terms across multiple lenders instead of accepting whatever one bank offers.
Your Next Step
Getting construction financials into bank-ready shape isn't just about loans, it's about building a more profitable, sustainable business. The financial discipline that impresses lenders also helps you identify unprofitable projects before bidding, improve cash flow timing, and make data-driven growth decisions.
But maintaining construction-specific financial statements requires specialized expertise. General bookkeepers often don't understand WIP reports, job costing, or unique construction accounting challenges.
At Construction Cost Accounting, we specialize exclusively in construction company bookkeeping. We prepare the exact documents lenders demand:
Monthly WIP reports with over/under billing analysis
Job cost reports comparing estimates to actuals
Clean, lender-ready balance sheets and P&L statements
Cash flow management and A/R aging tracking
Whether you're preparing for a loan application or want to understand your true financial position, our team ensures your books accurately reflect your construction business.
Ready to make your financials bank-ready? Contact CCA today to schedule a consultation. Let's build the financial foundation your construction business deserves.
