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Intro To Small Business Loans For Construction Contractors
Construction projects don’t always go as planned for small business owners. Additional expenses can arise, like the need to purchase equipment or supplies. A host of circumstances – from new investors to county codes to inclement weather – can delay the project’s start date. As if this didn’t put enough pressure on cash flow, contractors in the construction industry often do not get paid until they reach certain project stages.
United Capital Source has access to business loans for construction companies and contractors to obtain the business credit they may need to complete projects on time while covering operational expenses in the interim.
In this guide, we’ll answer the following questions and more:
What Are Construction Business Loans?
Construction business loans are small business loans geared towards the cash flow cycles and construction contractors’ periodic expenses. In addition to covering shorter-term needs and larger purchases, these small business loans can bridge revenue gaps until compensation comes in.
Small business loans for a construction company can take the form of:
- SBA Loans
- Equipment Financing
- Business Line of Credit
- Working Capital Loans
- Merchant Cash Advance
- Revenue-Based Business Loan
- Accounts Receivable Factoring
How Do Business Loans For Construction Companies Work?
Each of the products listed above can suit a different type of expense or cash flow issue. For example, let’s say a business owner needs a little extra money to purchase more supplies, new equipment or cover payroll until the next phase of the project is complete. Logical solutions to these construction company dilemmas include a short-term working capital loan or business lines of credit.
The decision typically depends on how long it will take you to repay the loan amount, as well as the likelihood of needing a construction loan again soon. Sudden expenses and cash flow shortages are prevalent with construction businesses. Thus, a business construction line of credit would prevent you from having to apply for more funding every time you’re unable to cover a short-term expense.
Maybe you’ve just completed a project, and you’re looking to ramp up for your next one. However, compensation isn’t scheduled to come in for a few weeks. In this case, it might help to consider accounts receivable factoring. The small business loan provider purchases the account for a discount price and then assumes the responsibility of collecting from your customer. Once the payment is collected, you receive the remainder from the initial sale, minus fees.
It’s important to note that construction loans can be designed to solve multiple problems. You might need to hire more workers, pay vendors upfront, or obtain special permits for the same project. We can tailor your loan amount and terms to accommodate each expense of your contracting business, even if they occur at different intervals.
Construction Business Loan Options Compared
|LOAN TYPES||MAX AMOUNTS||RATES||SPEED|
|Credit Card Processing Loans||$7.5k – $1m||Starting at 1.09||1-2 business days|
|SBA Loan||$50k-$10m||Starting at 5%||3-5 weeks|
|Business Term Loan||$10k to $5m||Starting at 5%||1-3 business days|
|Business Lines of Credit||$10k to $250k||Starting at 8%||1-3 business days|
|Receivables/Invoice Factoring||$50k-$10m||Starting at 5.8%||1-2 weeks|
|Equipment Financing||Up to $5m per piece||Starting at 5%||3-10 business days|
|Revenue Based Business Loans||$10K – $5m||Starting at 9%||1-3 business days|
What Are The Advantages of Business Loans For Construction Companies?
Construction businesses grow by taking on increasingly complex but lucrative projects. Thanks to construction loans, you can say “yes” when your cash flow would otherwise force you to say “no.” In other words, you don’t have to let mounting expenses, long gaps between compensation, or delays in start dates prevent you from accepting critical opportunities.
Cash flow shortages can make it difficult to retain employees and build loyalty. This is one of the biggest challenges of construction businesses. Construction loans ensure that you’re always able to pay your employees on time, even when projects get delayed. After all, a larger team allows you to take on larger projects.
You don’t need entirely consistent cash flow, a substantial bank balance, or excellent personal credit to be approved. You can still get funded in a matter of days, even if the majority of your operating capital is compromised.
For this reason, many contractors take out small business loans during the slow season so they can maintain funds to prepare for the busy season. In this case, we wouldn’t suggest a construction loan that requires a sizable payment shortly after money is distributed.
What Are The Disadvantages of Business Loans For Construction Companies?
Although there are many advantages to getting a construction loan, many small business owners balk at the prospect of getting into too much debt. As stated previously, receivables in the construction and contracting business can be inconsistent. With so many factors out of your control, it’s tough to predict when you may receive payment for services. Adding a loan payment to the mix might do more harm than good in some cases.
If your business credit or personal credit isn’t optimal, the best construction SBA programs may be unavailable. An SBA generally requires excellent credit because you’ll be receiving the best interest rate and loan terms up to 25 years in return. Some programs allow you to use real estate as collateral to help obtain an SBA loan.
Who Qualifies For Construction Business Loans?
Approved businesses generally met the following criteria:
How To Apply For Construction Contractor Business Loans:
The amount of paperwork required for the application process depends on your chosen product. For most products, funds can be approved and distributed in up to three business days. To get started, here’s how to apply:
Step 1: Choose the Right Product
Let’s get started. The first step is choosing the most sensible solution to the problem at hand. This should require a decent amount of research, as each product is designed to use for different types of expenses and cash flow cycles. Are you looking to cover a short-term or long-term cost? What is the project’s billing schedule? Considering the financial purpose will also help us determine the best lender and terms for your needs.
Step 2: Gather Your Documents
Here are the documents and information required for all construction loan types:
- Driver’s license
- Voided business check
- Bank statements from the past three months
- Invoice for equipment (for Equipment Financing)
- Credit card processing statements from the past three months (for Merchant Cash Advance)
- Accounts Receivable Aging Report (for Accounts Receivable Factoring)
- Accounts Receivable (for Accounts Receivable Factoring)
- Debt Schedule (for Accounts Receivable Factoring)
SBA Loans require additional documents and information. To learn what’s needed for the SBA Loan application, visit our SBA Loan page.
Step 3: Fill Out Application
You can begin the application process by calling us or filling out our one-page online application. Either way, you’ll be asked to enter the information from the previous section along with your desired funding amount.
Step 4: Speak to a Representative
Once you apply, a representative will reach out to you for a one-on-one consultation to explain your available options, repayment structure, rates, terms, and conditions. This way, you won’t have to worry about any surprises or hidden fees during the repayment process.
Step 5: Receive Approval
If and when you’re approved, funds for Business Term Loans, Business Lines of Credit, Working Capital Loans, Equipment Loans, Merchant Cash Advance, Revenue-Based Business Loans, and Accounts Receivable Factoring should then appear in your bank account anywhere from 1-3 business days. For SBA Loans, it usually takes 3-5 weeks to receive funding.
Your Construction Loan Gets Set Up – Now What?
Your construction business loan isn’t just a way to get financing for businesses. It’s also an excellent opportunity to start building (or improving) your credit.
Regardless of the type of construction loan you get, make all of your required payments on time to the lender and in full. If you get a business credit line or another form of revolving credit, keep your balance below the credit limit.
Consistently making your payments will positively impact your credit. And that means preferred interest rates and terms when you next need business financing.
What If I’m Declined For a Contractor Business Loan?
After assessing your business’s financial health, a lender may conclude that a construction loan would do more harm than good to your cash flow at this moment. In this case, we might recommend another tool for financing your small business, like a business credit card or even a personal loan. The business credit card and personal loan options are usually much easier to qualify for than small business loans. If you apply for business credit cards, you may not get the credit limit you need right away, but you can use a credit card as a tool to increase your credit scores.
If you want to improve your credit score as much as possible before applying, you should consider these credit repair services. We can help you identify the issues that keep your credit score down and develop effective solutions for eliminating them.
People Also Ask:
Why Do Construction Companies & Contractors Need Financing?
In most cases, construction contractors don’t need financing because they aren’t getting enough work. It’s because they are getting more work than their current resources, and the cash flow cycle will allow. Construction projects are becoming increasingly complex. They require more advanced equipment, to pay more workers, and more time. That means more upfront expenses and more time until you receive compensation. Even if you could afford these expenses, you’d have very little funding leftover to use until your first billing phase. This could be weeks or even months away.
Also, when you take on more projects, you have more bills to manage. It’s challenging to stay on top of your payments when your primary concern is completing the project in a timely fashion.
How Do Contractors Finance Construction Projects?
Construction contractors can finance projects with a myriad of business financing products. The product you choose depends on what you can qualify for and how much funding you need. If you’re looking for a significant amount, banks and credit unions carry the cheapest products with the most extended terms. However, these products are tough to qualify for. You’ll need excellent credit, perfect cash flow, plenty of money in the bank, and collateral such as real estate. If you can’t meet these requirements, you can still access substantial financial programs through companies like United Capital Source.
Banks and credit unions also prefer to lend more substantial amounts. Thus, if you’re looking to cover payroll, supplies, or other operational costs, companies like United Capital Source will be more willing to work with you. The size of your desired funding will not make you any less likely to earn approval.
How Long Can You Finance Construction Equipment?
At United Capital Source, we have access to new or used equipment financing for terms of up to five years. Terms and conditions for new or used construction equipment financing usually reflect the equipment’s relevancy. If we offered longer terms, someone could make payments long after the equipment in use has become irrelevant.
Can I Get a Construction Business Loan with Bad Credit?
Yes, six of the seven products mentioned above are accessible for borrowers with bad credit. Your interest rates may be higher, and your terms may be shorter because bad credit makes you more likely to default. However, if you have strong financial statements, cash flow, or can provide collateral, your bad credit may have less impact on your rates and terms. We can also customize your terms and payment frequency to ensure that you can make payments while staying current on other bills.
The only option that is not accessible with bad credit is SBA Loans. Compared to the other products, SBA Loans carry higher borrowing limits, lower rates, and longer terms. If you have bad credit, you’ll receive shorter terms to ensure you repay the loan in full.