He does not have enough credit to order materials?

That is a red flag.

A VERY LARGE red flag.

i am considering doing an addition with a friend of mine who is also a contractor. we've used him many times in the past but not for something as big as this. we have given him checks (smaller amnts of course) to start projects...and we trust him...my question is, since the homeowners are paying for the renovation anyway, why does it matter if the contractor has enough credit to front some of the costs and get started? is it that if he has bad credit, that reflects negatively on his business etc etc?
thank you

EMC, It is a precarious situation to be in. You are literally giving him a blank check.

Many contractors do multiple projects at a time. If he does not have lines of credit at various suppliers, then it is entirely possible that the money he receives from your 1st, or 2nd, or 3rd draw may be used to finish up the final items on another job, leaving yours incomplete and your money gone.

Also, if someone has had a lowering of their credit status by their suppliers form credit to COD, that could mean that they will use the money from you to pay off their bill at the supplier.

In addition, if they are in this as a profession (as opposed to a weekender or on the side guy), it is a bad sign, as brickeye said, if they are not successful enough in running their business to have lines of credit established. Because it means they have no reserves, and if something goes wrong, they may cut corners or walk away from the incomplete job.

Echo - Brickeyee and Juliekcmo.

Construction business is running a small company. All businesses need to have a line of credit to get them through the billing cycles.

I think there are two issues: available line of credit and a deposit required before the beginning of the project.

Construction companies (almost all companies doing custom work) ask for a deposit (earnest money, good faith money, whatever you call it) before the construction (or custom work) begins. This is my experience working with multiple companies in the past few years. It's typically 5 to 10% of the job in construction. Some ask for 25% or more before the work begins (ie custom cabinet companies, custom countertops etc.)

Is your guy asking for a deposit? If I was running a business, I would not spend my money without a guarantee that the customer is invested in the project. Unless the customer puts down a deposit, the customer can walk away from the contract without any monetary penalty. This is not a good place for the business to be in before the business starts to spend its money. I would absolutely ask for a deposit from my customer.

Maybe he gave you too much information regarding how he spends the deposit... That is entirely different territory of issues. Does the business have enough line of credit to get through the project?

BTW, on larger projects we did, we paid every two to four weeks. The companies generally need to be paid often enough to make their cash flow happen. Again, you, the bank and the construction company all need to be on the same page about this.

I almost forgot I posted in this forum since I cross-posted...

Thank you for the responses. We will be giving a deposit (4%) to our contractor and are working something out with the bank to directly pay the suppliers from where I sourced the larger ticket items, i.e. cabs/windows.