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How to Obtain Construction Business Loans

How to Obtain Construction Business Loans

The construction business is flourishing once again. Residential construction is the fastest growing industry for small businesses thanks to an increase in housing demand.

In fact, 60% of the top 10 fastest growing industries among SMBs revolve around construction. They include architects, contractors and real estate agents, according to SBA.

The commercial construction sector is also rebounding. Demand for office space and the resurge of disposable incomes will increase the need for retail buildings. Entrepreneurs eyeing the construction industry face the challenge of securing capital. Fortunately, construction business loans are a suitable solution.

Types of Business Construction Loans

Contractors often invest in materials and supplies before starting new jobs. Small construction businesses can access the following loans for funding:

  • Business line of credit: Ideal for contractors who need recurring financing to invest in growth.
  • Short term loans: Lump sum financing with fixed terms of repayment for working capital.
  • Invoice financing: Ideal for contractors who invoice many clients and want finances before they’re paid.
  • Equipment financing: For contractors who want to buy construction equipment.
  • Business credit cards: Suitable for paying small daily expenses such as fuel, inventory and tools.
  • SBA loans: Appropriate contractors interested in starting or buying construction business.
  • Commercial bridge loans: Ideal for real estate entrepreneurs.

As a contractor, you often invest in growth before on-boarding new clients. Traditional lenders such as banks find it difficult to give construction business loans to new entrepreneurs. Most new entrepreneurs may lack a proven track record. Furthermore, the construction industry is often seen as risky and unpredictable.

Let’s look at each type of loan in depth.

Business Line of Credit for Contractors

A business line of credit (or business credit card), commonly referred to as LOC, is a revolving loan that you can repay and use repeatedly to expand your construction business or cover cashflow gaps. Since you only pay interest on the credit, LOC is ideal for contractors who want quick financing.

A business LOC is suitable for most small construction businesses. You have access to funds that you can draw when needed. Unlike other loans, you don’t have to apply and wait for long.

Usually, the total costs for business line of credit depends on the annual percentage rate (APR). APR is a combination of fees and rates. Depending on your lender, APR, terms and qualifications may look like this:

  • APR: 13.99 to 40%
  • Prepayment penalty: None
  • Other fees: Although uncommon, some lenders charge service fees.
  • Loan amount: Maximum of $100,000
  • Repayment term: Up to 6 months
  • Repayment cycle: Monthly or weekly depending on your lender.
  • Time to funding: 1 to 3 days
  • Minimum credit score of 600
  • 1-year time in business
  • Minimum annual business revenue of $50,000

Business line of credit is available for contractors interested in drawing a pool of capital when needed. It’s beneficial when you get a new client and need to start working their project immediately. However, LOC can’t get you a loan exceeding $100,000. If you require more financing, you may have to find other options.

Short Term Construction Business Loans for Contractors

Short term construction business loans are suitable for contractors who require growth capital and have predictable expenses. Short term business loans provide a lump sum amount that need fixed monthly or weekly repayments of interest and principal. These loans attract high APRs of up to 50%, and have a competitive total cost of capital if you pay your loan in a year.

Short term loans are ideal for making immediate purchases since you’ll get a lump sum that needs repayment immediately. For instance, you can use the loan to hire a new employee and pay the salary until you complete the project.

Short term construction business loans will generally look like this:

  • Loan amount: Maximum of $500,000
  • Repayment term: 3 to 36 months
  • Repayment cycle: weekly
  • Time to funding: 1 to 3 days

In most cases, to qualify for short term business loans, you must meet the following:

  • Credit score: At least 500
  • Time in business: 1 year
  • Annual revenue: $100,000

Short term business loans are appropriate when you know exactly what you need. They can prove to be expensive if don’t pay back quickly. Also, they’re unsuitable for unexpected expenses.

Equipment Financing

Equipment financing like medical equipment finance, is a loan used to buy important equipment with a long shelf life. Lenders use the equipment as collateral for the loan. This financing is ideal for construction businesses with large contracts such as hospitals and schools. Such businesses may require new loaders, Caterpillar or bulldozers. Equipment financing can help you get them.

Usually, equipment financing carries the following terms and qualifications depending on your lender:

  • Loan amount: From $10,000 to $500,000
  • Repayment Terms: between 2 and 7 years
  • Credit score: At least 600
  • Down payment: 5% plus
  • Collateral: Equipment financed

Equipment financing is ideal for purchasing essential equipment for your construction business. It’s also suitable for replacing an old equipment.

SBA Loans for Construction Businesses

Small Business Administration (SBA) guarantees SBA loans making them carry long repayment terms with low interest rates.

SBA Loan Rates, Fees, qualification and Terms

  • Interest rate: 5 to 10%
  • SBA guarantee fee: 3 to 3.5%
  • Loan amount: up to $5 million
  • Repayment terms: maximum of 10 years
  • Repayment cycle: monthly
  • Time to funding: between 30 and 90 days
  • Credit score: at least 680
  • Down payment: between 10 and 20%

SBA loans can take a long time to get funded because of the paperwork and underwriting involved. These loans are also difficult to qualify for. To increase your chances, ensure you have the right business per industry, license and proof of needed contractor insurance.

Commercial Bride Loan

Commercial bridge loans are short term real estate financing meant for improvements to real properties. The renovations could be to sell the property or use it for business operations. Read more about commercial bridge loans here.

How to Increase the Odds of Getting Construction Business Loans Approved

Contractors find it an uphill task qualifying for the right loans. To increase your chances at getting approved, follow the following tips.

1. Demonstrate you can repay

Lenders are majorly interested in your ability to repay loans. Represent and present your business in a way that shows its potential to repay what you’re borrowing and grow.

2. Apply if you meet the required qualifications

Most lenders set the minimum requirements for approving a loan. Most businesses approved exceed these requirements. As such, apply for something you have a high chance of getting. Focus on construction business loans that you exceed the minimum qualifications.

3. Only borrow what you need

Don’t borrow more money than you need since you’ll be paying interest. If you’re working on a shoestring budget already, why increase expenses? Borrowing more than you need turns off most lenders.

It can prove difficult for contractors to get construction business loans because of market fluctuations in the industry. Nonetheless, you have plenty of options to acquire working capital. The best construction loans for contractors are flexible and can help you get the capital on time. Consult an expert whenever you need any financial assistance. Contact LenCred to speak with one.

About Brittni Abiolu

Brittni AbioluBrittni is a millennial, entrepreneur, investor and philanthropist. She has a Bachelor of Science in Computer & Information Systems from the University of Detroit Mercy and is currently a student in the Master of Entrepreneurial Transactions program at Central Michigan University. She enjoys writing about her experiences over the past 10+ years as an entrepreneur and uses data and information from reliable sources to back up what she writes about. Through her writing she aims to educate other entrepreneurs on how to obtain capital and build successful businesses doing what they love.

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