What secures a $150k materials line for a rehab GC?

I hire crews rather than fund them, so take this from the client side. When my GC has cash pressure I find out because the schedule slips, not because he tells me. He'll pull two guys off my unit turn to go finish a job where a draw is waiting. Your borrower's receivable risk and his clients' schedule risk are the same risk wearing different hats. Ask his clients, not him, whether jobs finish on the date he promised.

The joint check idea is more workable than he's making it sound. We do direct-to-supplier on turns over a certain size and the ordering delay is a day, maybe two, if the supplier account is set up properly in advance. His resistance might be about wanting flexibility to move materials between jobs, which is the exact behavior you don't want to fund.

The structure you sketched prices like a receivable factoring line and secures like an unsecured personal loan. Those two things do not go together.

Run the yield first. If his average outstanding balance is $110k rather than the full $150k, 1.5 percent monthly on the average balance is about $19,800 a year, plus $3,000 in points on the first facility. On $150k committed that is roughly 15 percent on committed capital and closer to 18 on deployed. That number only holds if he actually revolves. If he draws and repays every three weeks the fee income is real. If balances age past 60 days, you have stopped running a materials line and started funding losses on jobs that went sideways.

Your whole analysis rests on his clients paying draws on completed work regardless of how the flip is performing. That expectation breaks in a specific way. When an investor's hard money lender stops funding, the investor stops paying the GC, and the GC has already installed your materials. At that point the only recovery is a mechanic's lien claim against the property, and lien deadlines, notice requirements, whether an unpaid supplier or lender can assert or be assigned those rights, and lien priority against a recorded mortgage all vary by state. Some states require a preliminary notice within a short window after first furnishing or the right is gone. A construction attorney in his state has to build that part before you fund a dollar.

Practical middle ground: fund by purchase order, pay the supplier directly, require the client's draw to come to a controlled account, and cap concentration so no single investor client represents more than a quarter of the outstanding balance.

The concentration point is the one I'd chase hardest. Four to six jobs at a time might be two clients. If one investor is 60 percent of his book you're really lending against that investor's ability to keep raising money.

@canton's point about sizing to current volume is what changed my mind reading this. A revolver sized exactly to today's working capital need has no room for growth and no room for a bad month, so the borrower will treat it as permanent capital and never pay it to zero. I'd want a mandatory clean-down, balance at zero for some number of consecutive days each quarter. If he can't ever hit zero you've learned something important without losing anything.

Something nobody's said: he's coming to you because he's been financing his clients for free and calling it a business. 2 percent a month is 24 plus a year on materials he could be billing for at order rather than at inspection. The fix that costs nothing is renegotiating his draw schedule with his clients so materials are paid on delivery to site. Some investors will refuse. The ones who refuse are the ones whose receivables you didn't want anyway.

@lantern I've been told by two GCs that asking for material deposits loses them work with the volume flippers, who all pay on completed-work inspection because that's what their own lender requires. So the free financing is the price of access to that client. Doesn't make it a good business, just explains why it persists. @sable, I'd ask him what percentage of his bids he wins and what happens to that number if he asks for a materials deposit.