The construction industry has unique built-in challenges in operating a business. Whether a general contractor, electrician, plumber, HVAC, home improvement, remodeler, or any other construction trade, there will come a time when business financing is necessary to maintain or grow a small business.
The first step for business owners in that process is to identify the needs and benefits of getting a small business loan, a small business line of credit, or any other small business financing product. Let’s explore why most construction contractors need money for their business and ways to get business loans for your construction company.
Top 6 Benefits of Getting a Business Loan for Construction Contractors
1. Cash Flow (Working Capital)
As the saying goes, cash flow is king! Having a business credit facility, a good financing alternative, is an essential safety valve for those times when cash flows become tight.
- This is where project financing, one of the many different types of lending options, comes into play. All construction contractors, whether involved in large-scale projects or small residential renovations, have those times within their careers where projects need to be financed.
- A contractor may balance numerous projects or work orders simultaneously and must balance labor costs and supplies with payments and revenue. This delicate balance can be impacted when there is a surge in growth that doesn’t match current revenues or, even worse, an increase in delinquency, delays, or collections of completed work.
- A financing choice such as the business line of credit or bank financing can offer more flexibility and a higher max loan amount in these situations. This solution provides a buffer for the seen and unseen revenue shortage scenarios that a borrower in the construction sector might experience.
- The usage of personalized lending options like short term business loans or asset-based financing can also lend a hand in managing operational costs effectively.
2. Owning Your Own Equipment
Many construction contractors will rent equipment for specific jobs, but it becomes necessary and cheaper to own the equipment outright at a certain point. Here, the decision is often between a lease or purchasing outright equipment.
- Equipment purchases can sometimes be as daunting as a lump sum loan, and utilizing existing capital might not always be the most strategic move. This is where equipment financing loans, offered by reliable construction loan lenders, become a practical solution. Before securing a loan—a process that uses the equipment as collateral—the lender might require a construction equipment appraisal.
- SBA equipment loans have benefits such as lowered down payments, favorable interest rates, and extended repayment terms, almost mirroring the advantages of leasing- hence, making them an ideal option for upgrading equipment.
3. Marketing & Advertising
Don’t rely on referrals, although that is very important to nurture and build. Even if you are happy not growing your business, you need to protect your business from economic downturns and diversify how you acquire customers.
- Don't forget to diversify, whether you are focused on getting leads from the internet or joining a chamber of commerce event or other marketing means.
- Build your new marketing plans around strategies and tactics to help you meet those sales goals.
4. Hire Employees and Manage a Growing Team
- Skilled labor is the heartbeat of any construction or building trades business. Managing a growing team, especially during expansion, requires time, relationships, training, and a keen nose for managing the increased workload—an essential part of the success of a construction company. You cannot compromise if skill sets are not acceptable, as it creates a mediocrity climate in an organization, thereby risking increased employee turnover.
- Financial investment in this area is priceless. Sometimes providing signing bonuses or paying sub-contractors handsomely will insure a quality workforce
5. Making Payroll
There can be no room for error when it comes to managing payroll. As a business owner, you made a commitment that your employees will be compensated for their work, with no minimum exception. Not only is it a legal matter but a practical one as well. If workers don’t have faith they will get paid, then the bond of loyalty and equity commitment will be broken.
- It can be beneficial to have a business line of credit or investigate the perks of handling other business credit facilities such as a bank financing. This approach can alleviate any possibility of cash flow deficiency impacting the ability to make payroll.
6. Business Growth and Expansion
Growth and expansion require planning and can come in many forms. One common form of expansion could be embarking on renovation projects for your business facility, or perhaps even deciding to open a new retail center, where getting the project financing is key. The following is a list of possible areas of growth or expansion;
- Project financing for renovating an existing facility or opening a new retail center
- Purchasing equipment and/or machinery with the help of available lending options
- Acquiring a large contract, job, or project over an extended period of time using bank financing options
- A sudden spike in demand for your services due to economic or environmental conditions
- Planning for growth often involves a thorough SWOT Analysis. A SWOT analysis helps identify your business’s greatest strengths, weaknesses, opportunities, and threats.
- Keep in mind that successful growth for your business won’t materialize overnight—it might be long, arduous, and stressful. However, getting over these hurdles with the right strategies, like using construction loans for renovations, fulfilling the minimum requirements for the FICO score and equity in order to access a variety of lending options, alongside steadfast perseverance, you'll be on the path to successful expansion.
The 7 Best Business Loan Options for Construction Contractors
1. Business Line of Credit for Construction Companies
A Business lines of credit is a revolving credit line, similar to a credit card, that allows you to draw on-demand up to a credit limit. This is a great option for cash flow shortfalls, working capital, paying expenses or quick purchases.
Product Overview
Rates: 6.50% Interest rates or treasury index plus 1% to 2.5%
Terms: Open revolving line
Fees: Origination fees range from 0% to 3%
Payment: Monthly, bi-weekly or weekly
Credit Standards: Good to excellent preferred, all types considered
Processing Time: 24 hours to 3 days
2. Short-Term Loans for Construction Companies
Short-term business loans are defined as business loans with a duration of repayment of up to 24 months. Term loans offer a fixed amount up front over a set period of time with a fixed payment. Rates come in the form of an "interest rate" or a "factor rate". Short-term loans are easier to get approved for verses traditional financing because qualifications are easier with more tolerant credit worthiness and fewer documentation requirements.
Product Overview
Rates: Factor rates range from 1.09% up to 1.45%
Terms: 3 to 18 months in duration (typically 12 months or less)
Fees: Origination fees 0% to 5%
Payments: Weekly, bi-weekly, and in some cases, daily
Credit Score: All types considered
Time in Business: 1 year
Processing Time: 24 hours to 3 days
3. Business Cash Advance for Construction Companies
Business Cash Advances (a Purchase of Future Sales) advance a fixed lump sum of money with a discounted purchase price, also known as a specified amount, to pay back. The advance is repaid by taking a fixed percentage of future overall sales
Product Overview
Rates: Factor rates 1.10% up to 1.45%
Terms: Estimated payback periods are 3 to 18 months, but no term limit
Fees: 1% to 3% origination fees
Payments: Weekly or daily payments
Credit Standards: All credit types, from poor to excellent considered
Time in Business: More than 6 months
4. Invoice Financing/Factoring for Construction Companies
Invoice financing advances the outstanding balance to business owners to increase the speed of cash flow to the business. This solution provides cash quickly, and there is no need to wait for outstanding invoices to be collected and received by the client with invoice financing in place. Invoice financing has affordable costs ranging from 1% to 2.5% fee off of the face value of the invoice advanced.
Product Overview
Rate: None
Terms: No term limits
Fees: 1% to 3% fee based on Invoice. Monthly Service fees may apply depending on the volume of invoices factored
Credit Score: The credit of the clients needs to be favorable, NOT the owner advancing off invoices.
5. Purchase Order Financing for Construction Companies
Purchase order financing allows businesses to raise capital to pay suppliers upfront for verified purchase orders. Purchase order loans will finance an entire order or a portion of it, depending on the purchase order funder. When the supplier is ready to ship the order, the purchase order financing company collects payment directly from the customer. The purchase order funder will subtract their fees and then send the invoice balance to your business.
Product Overview
Rate: None
Terms: No term limits
Fees: 1% to 3% fee for each purchase order. Monthly service fees depending on volume, may also apply.
Credit Score: All parties need favorable business credit history but all credits considered
6. SBA 7(a) for Construction Companies
The Small Business Administration (SBA) is the federal agency that offers loan programs to small businesses, serviced by SBA-approved lenders. However, it's worth exploring different lending options such as a lump sum loan or considering various construction loan lenders, to alleviate potential disadvantages of relying solely on this form of real estate financing. With a simple comparison, you can secure small business loans without affecting your FICO credit score. SBA not only sets the programs and guidelines but also offers loan guarantees to approved lenders, ensuring affordable financing even for businesses that might not qualify with traditional bank financing.
Product Overview
Rate: Interest rates starting at 6.50%, treasury index plus 1% to 2.5%
Terms: 3 to 25 years
Fees: Origination fees 0% to 3%
Payment: Fixed monthly
Credit Score: Good to excellent are preferred, but all credit considered despite the potential disadvantages.
SBA Standard 7 (a) Loan Program
The SBA loan 7(a) is the SBA’s primary program designed to offer financial assistance to small businesses. Some lenders under this category may offer 7(a) loans that work akin to construction loans during your build-out phase, paying in disbursements and allowing you to pay interest only until construction completion, potentially reducing the disadvantages of real estate financing.
SBA Loan Program 504
The SBA 504 loan, much like a commercial construction loan, assists you in managing your balance sheet during a build, as lenders often accept interest-only payments during construction. This economic development loan program provides another route for business funding, championing business expansion and job creation, despite potential disadvantages of real estate financing.
SBA Disaster Loans
Economic Injury Disaster Loans (EIDL) provides assistance in the aftermath of natural disasters like tornadoes, wildfires, or floods. Additionally, when President Trump declared Covid-19 a nationwide emergency on March 13th, small businesses could access this program for emergency financing, acknowledging the inherent disadvantages.
7. Equipment Financing
Equipment financing secures equipment as collateral. This method of project financing is a viable choice for both large-scale contractors and smaller residential renovations companies. The reason behind this is that if you opt for equipment financing or lease, the financing uses the equipment itself as collateral, often allowing you to sidestep other asset collateral requirements. Acquisition of such finances often hinge on good to excellent credit score. Although the paperwork involved is limited, it expedites the process from approval through to completion, keeping your project moving forward.
Product Overview Rates: Factor rates from 1.09% up to 1.45% or interest rates starting at 4.5%
Terms: Flexible 2 to 7-year terms
Fees: Origination fees ranging from 0% to 3%
Payments: Secure weekly or daily fixed ACH payments
Credit Standards: Good to excellent credit preferred for optimal outcomes.
Documentation: Minimal documentation required, just a 1-page application and invoice for equipment
Time Frames: As swift as 24 hours to 3 days. Lenders like those from SBA, encompassing certified bankers from the American Banker's Association in Business and Commercial Lending, could require an appraisal, which factors in additional costs, or conditions tied to inspection outcomes.
Types of Construction Companies We Serve
- General Contractors
- Plumbing Contractors
- Electrical Contractors
- HVAC Contractors
- Home Improvement/Remodelers
- Landscaping Contractors
- Handyman Businesses
- Residential House Builder
- Commercial Building Contractors
- Construction Manager
- Sub-Contractors
- Demolition Contractors
- Property Maintenance Contractors
Identifying Construction Industry Challenges
Challenges that are prevalent in the construction industry, as mentioned below:
Finding Skilled Labor
At the core of any construction trade is skilled labor. Any chance of success will require consistent, quality, skilled labor to complete the tasks. Maintaining and growing a skilled workforce will be an ongoing process that will deserve significant attention.
Completing Projects on Time
Operational management of projects requires organizing, scheduling, performing, and executing in a specific time frame and job requirements. This not only helps in achieving future projections with accuracy but also sets a benchmark for consequent assignments. To ensure requisites such as supplies, labor, and customer requests need are balanced for construction milestone, it is necessary to tie these to your construction timeline. The ultimate goal is not only completing a project on time, but to attain it without any compromise on quality.
Rising Cost of Materials
Of all the challenges, material costs represent the challenge that contractors can least control. However, in the light of rising costs, project financing can play an instrumental role in mitigating these expenses.
There are strategies and pre-planning measures that have to be implemented to finance materials such as;
- Tapping into your savings
- Purchasing in bulk
- Anticipating price increases by monitoring supply chains
- Participating in co-operatives for material purchasing
- For those without sufficient funds, loans are an option. Many construction companies often turn to bank financing or lump sum loans, which serve as effective ways to support their operations. Construction loan lenders, such as the SBA, offer affordable financing options even if a company doesn't qualify with a traditional bank. This provides low-rate funding for commercial projects.
- If your project expands and presents the need for additional equipment, consider lease financing where the equipment serves as collateral, helping avoid the need to put up other assets. This not only aids in managing more specialized tasks, but also offsets the cost of acquiring additional equipment. Subleasing is a common practice that allows companies to bypass the cost of additional equipment while maintaining their balance sheets.
Productivity/Profitability
Construction contractors need to worry about completing projects with quality on time while also making a profit in the process. So, it sounds simple, right? But the reality paints a different picture where many contractors struggle with a profit due to pricing proposals made to “win” the contract or bid. Let’s face it: Price seems to take priority with customers over expertise, experience, and minimum equity in the business. But the reality is it doesn’t have to be that way.
- Reputation and quality at an acceptable cost are what really win. It’s up to the contractor to change that mindset with customers to create a better balance with price vs. quality and win the job more times than not.
- If you build a quality labor workforce, manage material costs, and set proper estimates for profit without compromising the quality
Contractors should know that if you build a quality foundation, the rest is just execution, be it meeting the minimum annual revenue of a certain lender or maintaining a suitable credit score.
Attracting New Business
Finding customers is an ongoing process. Building a strategy that will withstand the ups and downs of the construction/contractor business is key to longevity. The marketing plan should be multi-faceted to include multiple channels of business acquisition methods and not rely on referrals alone.
Getting Paid! (Invoicing and Payments)
Getting your work orders and invoices can be challenging, especially given the current economy. Taking measures to mitigate potential collection issues will be important, including getting larger deposits upfront and considering the approach of installment payments. Adding stages from installment payments to funding in the project, as most times, the installments arrive at the beginning of certain construction stages such as laying the foundation, flooring, or roofing. A business credit facility can also aid your revenue flow during times when customers are unable to make a lump sum payment. You certainly don't want to find yourself without a thought out collection system capable of dealing with these uncertain times.
Choose AdvancePoint Capital for your Construction Business Financing Needs
- Experience. We have been offering guidance and funding construction businesses for years.
- Trust. We have excellent reviews and feedback from construction companies and our objective, independent guidance has been praised.
- Loan Specialists. Our business funding specialists know the construction industry. They're ready to answer your FAQs and provide independent advice.
- Products. We truly understand the marketplace and offer a variety of construction business loan products. You can always look into our array of products on our website.
- No Cost, No Commitment Quotes. Feel free to reach out via email for further information without any obligation.
Let’s Get Started and Grow Your Construction Business Now!
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