Looking to expand your construction business? You’ll need funds to grow. That’s where a construction business loan or financing can help. Get financing to purchase supplies, pay your employees or update equipment. Read on to learn about the different types of funding options for your business.
Financing Your Construction Business for Success
Your clients rely on your expertise and professionalism to build and improve their homes and businesses. In order to provide the type of service that your customers expect, there are a lot of moving parts you need to manage — including staff, supplies and bills. All of these business needs require cash at your disposal.
A construction loan or financing can help you accomplish the following:
Buy Materials and Parts
You just secured a contract to construct 6 single-family homes. The developer has asked that you begin construction in 1 month. It’s a great opportunity for your business but you’re in need of funds to buy the materials you’ll need to get started. A construction business loan can provide you with capital to invest in your new project.
You bought your CAT excavator circa 2000. The bright yellow has faded to a dull mustard, and rust covers your machine like the countries on a map. You’ve replaced parts as repairs have come up, but you’re overdue for an upgrade. The construction contract you’ve just secured seems like the perfect time to buy that new piece of equipment. After all, it could lead to more business. The right type of construction financing can help.
According to 2018 data provided by the U.S. Bureau of Labor Statistics, the median pay for construction workers and laborers is about $17 per hour. If you had 5 employees working 40-hour weeks, you’d need to come up with more than $13,000 each month just to pay your workers. That can be challenging when you haven’t yet been paid for the job.
Fill Invoice Gaps
If cash flow is a problem, there’s financing that can help. Get funding to supplement your revenue as you’re completing construction jobs and waiting to be paid for them. Small business loans are available to provide funding while you’re in between jobs.
In a recent survey of construction firms by Tsheets, 84 percent reported problems with cash flow, and 19 percent said they dealt with cash flow issues constantly.
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Best Financing and Loan Options for Construction Companies
There are many different types of financing options for construction business owners. Factors that can impact interest rates, loan amounts and terms include loan type, lender, credit score, time in business and revenue.
Your cement mixer broke down. Your bulldozer is in disrepair. You need a new forklift. When heavy equipment financing is what your business needs most, there are financing options out there specifically for this type of purchase.
Though not a construction equipment loan, equipment funding is a type of secured financing. This means that the equipment you buy serves as collateral. Because this type of financing is secure, lender risk is reduced. How? If you default on your payments, they can recover their funds by selling your equipment.
Decisions for equipment financing can be quick, within days. To apply for this type of financing, you might need a minimum credit score of 600-620. Repayment terms can range from 1-5 years.
Working Capital Loans
Working capital financing is meant for short-term needs, and borrowers often repay their loans in 18 months or less. As such, working capital loans for construction companies would be best used toward daily or momentary expenses, such as:
- Employee wages
- Office rent and utilities
- Equipment purchase
- Marketing costs
Plus, when you apply for a loan, access to capital can be fast. Depending on the lender, you could have a decision in a day, and often, no collateral is required. If you have recent revenue, this might be a good option for you. While credit score requirements vary by lender, you might be able to get approved for a working capital loan with a credit score in the low 500s.
Lines of Credit
Another type of construction company loan option is a business line of credit. Repayment terms can range from a few months to a few years. Credit score requirements may range from 560-620, depending on the lender and whether the credit line is secured by collateral.
Business lines of credit are similar to business credit cards without the tangible card. Also, business lines of credit generally have higher credit lines and lower interest rates. Like a credit card, however, you’re approved for a certain credit limit. You can charge any amount up to your limit and make minimum payments. You’re only charged interest on the amount you borrow. Once you pay down your debt, you replenish your credit line. Weekly or monthly payments may be required to repay your debt, depending on the lender.
Invoice financing is a funding option that could offer a quick boost of cash flow in the short term. How does it work? Lenders advance you a percentage of the value of an unpaid invoice, which could range from 70%-90%, and hold the remaining percentage until your debt is paid in full. You’re typically charged a weekly fee until the debt is repaid.
After you’ve completed all of your payments, the lender will provide you with the remaining percentage. In other words, if your advance was for 90% of the value of an invoice, you’d be entitled to the remaining 10% once you paid back the 90% advance plus applicable fees.
Credit score requirements vary and may range from 530-600, with some lenders not requiring any minimum credit score. Lenders are more interested in the quality of your invoices and the ability of your customers to pay their bills. So if you’re confident your clients will pay their bills on time, invoice financing may be an option for you.
Merchant Cash Advance
Unless you have an established construction business, some lenders might find it risky to lend money to you. A merchant cash advance (MCA) is a short-term funding option in which you borrow money against your business’s future revenue.
Repayments are made daily or weekly until you pay off the amount you were advanced and the accompanying lender fees. This payback structure reduces the risk to the lender. You might consider this type of financing if your credit score is in the low 500s.
Small Business Administration (SBA) Financing
While the SBA itself doesn’t offer loans, it does provide a guarantee in case of borrower default. In this way, SBA-backed loans are less risky for lenders. In some cases, the SBA insures 75-85% of the loan amount, depending on the total value.
SBA Express Loan
While the approval process for traditional SBA term loans can take time, there’s an alternative — the SBA Express loan, which can be funded in about 1 month. While it’s a quicker option than other SBA loans, funding maxes out at $350,000. Interest rates can be higher than those you’d see with other SBA loans, and repayment is made over 5 or 10 years.
SBA 7(a) Loan
Another option to consider is the SBA’s 7(a) program. These loans allow borrowers to use funds for working capital, building renovations, equipment purchases and certain debt refinancing. Construction business owners may be able to apply for funds up to $5 million. Depending on their use, funds may be able to be repaid over 25 years. The 7(a) approval process often takes 2-3 months.
SBA Line of Credit
The SBA also guarantees one-time and revolving credit lines, known as CAPlines. Those in construction can consider the Builders CAPline. This type of funding can be used to finance labor and materials associated with commercial and residential construction and renovation projects. Repayment spans 5 years, and the construction project acts as collateral for your funding.