How to Use a Business Line of Credit Correctly for a Restoration Company

Insurance work hands you a structural cash gap that no amount of profitability fixes on its own. You pay your crew weekly, but the carrier pays you in 60 to 90 days — ACV up front, the RCV holdback after completion, supplements whenever they get approved. The median restoration shop carries AR equal to about 16.5% of revenue and runs a DSO near 60 days. That money is real and it is yours. It is just not in your account on the Friday payroll clears.

A line of credit is built for exactly this. It is not a sign of weakness, and it is not free money. Used correctly, it is the cheapest, fastest tool you have to turn earned-but-uncollected AR into cash on payroll day, then disappear when the AR shows up. Used incorrectly, it quietly becomes a second mortgage on a business that is bleeding — and you will not notice until the balance has not touched zero in eighteen months.

This post is for the owner of a $1M–$5M restoration company who is bridging payroll against insurance AR, gearing up for a CAT season, or sitting in front of a banker about to size a line. It covers what an LOC actually is and why it fits restoration, how to size it, the correct uses, the wrong uses that sink shops, the discipline that keeps it healthy, and how it plugs into your 13-week cash forecast. The tool is simple. The discipline is everything.

What a Line of Credit Is and Why It Fits Restoration

A business line of credit is revolving credit. You are approved for a limit, you draw what you need when you need it, you pay interest only on the drawn balance, and as you repay, the available room comes back. It works like a credit card with a far lower rate and a real underwriting conversation behind it.

That revolving structure maps perfectly onto the insurance AR lag. The work is done, the carrier owes you, but the payment is weeks out. You draw to cover the outflow, the AR lands, you repay. The line goes back to zero and waits for the next gap. Nothing about that is a problem — it is the line doing its job.

The reason an LOC beats parking idle cash for this is timing. Working capital you target at 15–25% of revenue is the buffer; the line is the surge tool on top of it. You should not hold three extra months of payroll in cash earning nothing just in case AR runs late — that is dead capital. You hold a reasonable buffer and keep a revolver standing by for the predictable gaps.

How to Size a Line of Credit

The sizing rule for restoration is roughly 10–20% of annual revenue, which lands close to 1 to 1.5 months of your peak revenue. That is enough to bridge one full insurance AR cycle and absorb one CAT deployment's front-loaded outflow without choking.

You size to peak, not to average, because the cash gap is worst in your busiest, most profitable months — costs scale with volume immediately while AR lags a quarter behind. A shop that sizes the line to its slow-season run rate will run out of room exactly when a storm fills the schedule.

If your banker offers more, you do not have to use it — unused room is fine and costs little. If they offer materially less, that is usually a signal about your AR quality or your debt service coverage ratio, which banks want at 1.25x or higher. Fix the underlying number rather than forcing the line larger.

The Correct Uses: Always Self-Liquidating

There is one test for every draw: can you name the specific receivable that will repay it, and roughly when? If yes, draw. If no, stop.

• Bridge payroll and equipment during the AR lag. The work is done and billed, the carrier owes you, payroll is Friday. Draw the gap, repay when the carrier pays.
• Fund a CAT deployment's outflow. A catastrophe deployment is front-loaded — crews, lodging, fuel, and rented equipment hit your account weeks before the first carrier payment. The LOC fronts that outflow; the deployment's AR liquidates it.
• Smooth seasonal timing. Your busy season generates the revenue and the cash gap at the same time. The line covers the timing mismatch between when you spend and when you collect.

Every one of these is self-liquidating: the draw is repaid by a specific, identified incoming payment, not by hope or next month's new work.

The Wrong Uses: The Evergreen Balance Trap

The fastest way to ruin a good line of credit is to use it for anything that does not pay itself back. These are the failure modes that sink restoration shops.

• Funding losses. If you are drawing to cover costs because jobs are not profitable, the line is masking a margin problem. The draw never gets repaid because there is no AR coming to repay it.
• Covering chronic unprofitability. A one-time bad month is a bridge. Twelve straight months of drawing to make payroll is a business that does not work, financed by a banker who has not figured it out yet.
• Financing owner distributions. Taking money out of the company on borrowed funds is borrowing against the future to pay yourself today. Distributions come from profit and cash, never from the revolver.
• Permanent working capital you never repay. If the business genuinely needs more permanent capital, that is an equity or term-debt conversation, not a revolving line. Using a revolver as permanent capital is the evergreen balance — and it is the single most common way restoration owners lose their line at renewal.

The Discipline That Keeps the Line Healthy

A line of credit is only as good as the rules you run it by. Four habits separate a healthy revolver from an evergreen anchor.

1. Draw against identified receivables. Before you draw, point to the AR that will repay it. No named receivable, no draw.
2. Repay on collection. The week the bridging AR lands, the draw comes off the line — automatically, not when you get around to it. This is non-negotiable.
3. Revolve to zero periodically. Aim to touch a zero balance at least once a quarter. If you cannot, something structural is wrong and the line is hiding it.
4. Watch utilization. Keep average utilization under about 50%. Sustained high utilization tells your banker the line funds operations, not timing — and that is what triggers a review or a non-renewal.

Track supplement collection while you are at it: shops that track supplements collect 85–92% of approved supplements versus 65–75% for those that do not. Better collection means less time on the line and a smaller, cheaper bridge.

How the Line Interacts With Your 13-Week Forecast

The line of credit and the 13-week cash flow forecast are a matched pair. The forecast is the brain; the line is the hands.

Your rolling 13-week forecast projects inflows by AR source against outflows week by week, with a minimum-cash trigger line. It tells you, weeks ahead, the exact week your cash dips below the floor and the exact week the bridging AR lands. You draw the gap — no more — and you schedule the repayment against that expected collection on the same sheet. You watch the projected balance climb on the draw and fall back to zero on the collection.

Without the forecast, you draw on instinct and repay when you remember, which is how evergreen balances are born. With it, every draw has a planned repayment week before the money ever leaves the line. The forecast turns the LOC from a panic button into a scheduled, self-liquidating instrument.

Common Mistakes

• Sizing to average revenue instead of peak. The cash gap is worst in your busiest months; a line sized to the slow season runs dry exactly when work is good.
• Drawing without naming the receivable. If you cannot say which AR repays the draw, you are funding a hole, not bridging a gap.
• Letting the balance go evergreen. A revolver that never hits zero has silently become a term loan funding losses or permanent capital.
• Funding trucks and drying equipment on the revolver. Permanent assets belong on equipment or SBA loans; the LOC is for short-term, self-liquidating timing only.
• Paying owner distributions from the line. Distributions come from profit, never borrowed money.
• Ignoring utilization until renewal. Sustained high utilization is the number your banker watches; surprise non-renewals start there.
• Using the line to dodge a billing problem. If AR is late because supplements are not being chased, fix collection — do not borrow around it.
• Running the line without a forecast. Drawing and repaying on instinct is how discipline erodes into an evergreen balance.

Frequently Asked Questions

How big should a restoration company's line of credit be?

Size it at roughly 10–20% of annual revenue, or about 1 to 1.5 months of your peak revenue. A $2M shop typically wants $200K–$400K; a $4M shop wants $500K–$800K. The goal is enough to bridge one full insurance AR cycle and one CAT deployment, not enough to fund the business permanently.

What is the right way to use a line of credit?

Draw against receivables you have already earned but not yet collected, then repay the draw the week that AR lands. Correct uses are bridging payroll during the 60–90 day AR lag, funding the outflow of a CAT deployment, and smoothing seasonal timing. Every draw should be self-liquidating from a specific incoming payment.

What should I never use a line of credit for?

Never use it to fund losses, cover chronic unprofitability, finance owner distributions, or as permanent working capital you never repay. If the balance never returns to zero, the LOC has stopped being a bridge and become a term loan you are paying revolving interest on — the evergreen balance trap.

What is the evergreen balance trap?

An evergreen balance is a line-of-credit balance that never gets paid back down to zero. It usually means you are funding structural losses or permanent working capital with short-term revolving credit. Banks notice, your interest cost compounds, and you lose the bridge you needed for the next real emergency.

How does a line of credit interact with the 13-week cash flow forecast?

The forecast tells you exactly when and how much to draw. It projects the week your cash dips below your minimum threshold and the week the bridging AR lands. You draw the gap, schedule the repayment against the expected collection, and watch the balance return to zero — all on the same sheet.

Should I use a line of credit or an SBA loan to fund a CAT deployment?

Use the line of credit for the deployment's short-term outflow — payroll, lodging, fuel, and equipment that you will recover from insurance AR within 60–90 days. Reserve SBA or term debt for permanent assets like trucks and drying equipment. The LOC is self-liquidating; the term loan funds things that outlast a single job.

What line-of-credit utilization is healthy?

Aim to keep average utilization under about 50% and to touch zero at least once each quarter. High sustained utilization signals to your banker that the line is funding operations rather than timing gaps, which can trigger a review or a non-renewal at your next annual renewal.

Can I get a line of credit if my AR is always 60–90 days out?

Yes — that lag is exactly what an LOC is designed for, and a clean AR aging report by carrier strengthens the application. Bankers want to see that your receivables are real, insurance-backed, and collectible. Show a tracked supplement collection rate and a DSO in the 45–65 day range and you are an easier approval, not a harder one.

What does a banker look at when approving a restoration line of credit?

They look at AR quality and aging, debt service coverage ratio (typically 1.25x or higher), working capital, and whether prior LOC balances revolved to zero. A history of clean, self-liquidating draws is the single best thing you can show — it proves the line is a timing tool, not a crutch.

How do I know when to draw on the line versus wait?

Draw when your 13-week forecast shows cash falling below your minimum threshold before a known receivable lands, and only up to the amount of that identified receivable. If the gap is caused by a job that has not been billed or an AR you cannot name, fix the billing first — do not paper over a collection problem with a draw.

Is interest on a line of credit worth it for bridging payroll?

Almost always yes. A few hundred dollars of revolving interest to cover a payroll you would otherwise miss protects your crew, your reputation, and your ability to take the next job. The cost of a bounced payroll — lost techs, stalled jobs, damaged carrier relationships — dwarfs the interest on a short bridge.

What if I am already carrying an evergreen balance I cannot pay down?

Stop treating it as a cash flow problem and diagnose the cause. Either you are unprofitable, your AR is not being collected, or you funded permanent assets with the line. Term out the structural portion into an SBA or equipment loan to free the revolver, then rebuild the discipline of revolving to zero. A books audit will tell you which of the three you are dealing with.

Key Takeaways

• A line of credit is the right tool for restoration's structural cash gap — but only as a self-liquidating bridge, never as permanent capital.
• Size it at roughly 10–20% of annual revenue, about 1 to 1.5 months of peak revenue, and size to peak because the gap is worst in your busiest months.
• Correct uses bridge payroll, CAT deployments, and seasonal timing — every draw repaid by a specific, named receivable.
• Wrong uses fund losses, chronic unprofitability, owner distributions, or permanent working capital — the evergreen balance that never returns to zero.
• The discipline: draw against identified AR, repay on collection, revolve to zero quarterly, and keep utilization under about 50%.
• Your 13-week forecast tells you when and how much to draw and schedules the repayment before the money ever leaves the line.

Sources Cited

• RIA Cost of Doing Business Report, 2024 — insurance restoration AR cycle of 60–90 days, median AR-to-revenue near 16.5%, ~60 day DSO and healthy 45–65 day target, working capital targets, and supplement collection rates.

Related reading: The 13-Week Cash Flow Forecast for Restoration · Insurance Pays in 90 Days, Payroll Is Friday · Talking to Your Banker About an SBA Loan · Restoration Company Financial Benchmarks