Construction Business Loans: Everything You Need to Know
As a general contractor, you know that obtaining construction business loans is important to running a construction business and operating in a fluid fashion.
Full payment for a project does not typically come until at least 90 days after the project start date, but construction costs don’t wait around, which makes construction loans a necessity to function.
When a new job is taken on you receive a small down payment upfront as well as progress payments or tiered payments as the job hits certain milestones. This delayed payment structure makes obtaining construction business loans crucial to maintain positive cash flow.
Because of this structure, contractors need to come out of pocket for many expenses such as:
- Payroll
- Material Costs
- Insurance
- Equipment
Contractors know that obtaining funding is the solution. But what do you do when you can’t be approved– or can’t wait– for a traditional bank loan?
Why Take Out a Small Business Loan Instead of Going to Your Local Bank or Traditional Lender?
It’s all about timing.
Most banks and traditional lenders (such as SBA loans) take way too long on loan approvals. And even if you try to avoid the timing issue by planning when you need it, many contractors that apply for construction financing with their local bank find that they can’t be approved without collateral.
Banks use traditional underwriting practices, which places the commercial construction industry in a high-risk bracket. That means you’ll need to have something to put down to secure the loan otherwise you’re not likely to be approved.
However, this needlessly puts you at additional risk on each and every job. Not to mention, puts you under extra stress that you don’t need.
Alternative lending offers a way around these strict requirements and gives business owners a path forward.
At excel we’ve worked with hundreds of construction business owners to offer unsecured loan options that give you the funding you need while affording the flexibility to get approved without having to put down hefty collateral.
Short application, get approved in as little as 24-48 hours:
Types of Construction Loans: Alternative Loan Options
So, what are your options for construction loans?
Well, you’ve got a lot. And it all comes down to what you need the funds for and what type of loan fits your business and the types of construction projects you take on.
As mentioned above, no matter what you need funding for, there are several working capital loan options available. However, some construction loan options are designed for specific needs while others are more general.
Let’s break each down individually to give you a better idea of which might be a good fit for you:
1. Equipment Financing
Equipment financing is used to help you purchase whatever equipment your business needs to run smoothly.
The loan amount is dependent upon the type of equipment the borrower needs, as the repayment term is usually as long as the expected life of the piece of equipment.
2. Invoice Factoring
Invoice factoring is used for short-term cash flow issues, especially when your business doesn’t qualify for a traditional bank loan or any other alternative solution. That’s because it depends less on your credit score and more on other business factors such as your accounts receivable.
The lender will factor your business’ customer’s invoices to match your working capital needs.
This type of program is rarely used for contractors since progress payments cannot be factored. Factoring companies only use invoices for work complete. In the construction business, it typically happens this way.
3. Unsecured Business Loans
Unsecured business loans were designed for business owners to enjoy the benefits of a merchant cash advance who do not accept credit cards at there business. Most contractors do not receive credit card payments – and even if they do its typically a very small percentage of the annual gross sales.
This works as a purchase of future sale at a discount that is converted into a set payment. This payment is remitted via ACH usually daily, weekly or monthly.
This allows you as the borrower to get construction loans without any collateral, just your sales. It also requires a lower credit score compared to traditional lending for the same reason.
4. Merchant Cash Advance
For those of you who accept credit cards at your business, split funding, or a merchant cash advance, is a construction business loan based on a purchase of your future credit card sales at a discount.
Payments are collected at a set percentage of your credit card sales, which is nice because that means when business is down– so are your payments. And when there is no business– no percentage.
For that reason, this method really helps during a particularly volatile market or rough patch in your construction business.
It also doesn’t have a stringent a credit score requirement due to factoring in your credit card sales more than anything else.
5. Term Loans
Our fourth construction business loan option, term loans have a set repayment schedule and interest rate and mature between 1 to 10 years depending on the term of the loan. Most commonly being short-term loans which offer a quick lump sum of cash with a short repayment date.
However, keep in mind that a short-term loan, or any other term loan, requires financial statements as well as 2 years of business history and one filed tax return.
6. Business Lines of Credit
A business line of credit is a rotating line of credit which you can dip into whenever the business needs it most.
Similar to a credit card, so long as you pay off your balance you can continue to use that line of credit continuously. Interest is then only paid off the amount that is used.
7. Asset-based Lending
Lastly, with asset-based lending, the assets of a business, such as inventory, accounts receivable, and other balance-sheet assets are used as collateral.
Plus, because this financing type is secured with collateral, interest rates tend to be low and credit score requirements are lower as well. Having applicable collateral also makes an asset-based loan easier to obtain.
Complete our short application and get approved fast:
How to Get a Construction Loan: How Do Construction Loans Work?
Ultimately, it’s up to you to do your research and find out what your best small business loan options are.
It’s your business and no one is going to look out for it like you will, so take the necessary steps to educate yourself and then take action to obtain the funding your business needs, whether that’s to keep things afloat or to take things to a whole new level.
Whatever the case, don’t let a lack of funding hold your business back from realizing it’s potential.
To apply for a construction business loan with Excel Capital, only four things are required:
- Four months of recent business bank statements
- Four months of business credit card processing statements
- A one-page application
- And just a few minutes to get started
We’ve made the process of getting a small business loan simple and straightforward so you can get back to what is most important– running your business.
Once everything is received, you can be presented with an approval, your loan terms, and funded in as little as one business day– that’s right, just 24 hours.
Get the funding your contracting business needs by completing our short, 2-minute application.
Excel Capital Helps Contractor Marty Secure a Loan: A Case Study
While the construction business is one of the oldest, most flourishing, and most competitive industries around, there comes a time when many of its business owners need access to working capital.
The cost of equipment, materials, payroll, and slow turn-around rates trump the cash flow coming in, and many construction company owners find themselves weighed down by bills and overhead costs.
Since the great recession of 2008, a traditional bank loan is no longer the go-to solution when it comes to acquiring capital.
That old-school way of doing things sometimes ends in heartbreak due to waiting weeks just to receive an answer. That’s where the alternative financing industry comes into play.
With financing solutions such as the ever-popular merchant cash advance, ACH loan, asset based loans, equipment financing, and more, access to working capital is easier than ever.
Funding Needed Fast
Recently, Marty, a construction company owner from Georgia reached out to the Excel Capital team.
Marty was in a crunch. He needed funds– and he needed them fast.
With a handful of projects on his plate, along with receivables due on a large ongoing project not being paid on schedule, Marty asked us for working capital to be used towards the purchase of materials, equipment, licensing, and payroll.
Marty’s workers and office employees needed to be paid and materials needed to be purchased. So, waiting for payouts was not an option.
In order to get things back on track, as well as to generate new growth, Marty asked our sales rep, Jordan for help in securing an ACH loan. A short term funding product, an ACH loan is paid on a daily or weekly basis by direct ACH debits.
Marty had close to $200,000 tied up in projects which wouldn’t come in for at least thirty days, plus roughly $150,000 in retainage for completed contracts. However, that was going to be payed out over six months.
He also had both a $2 million and a $1.5 million contract on the table respectively (both carrying a 20% gross profit), but those were not set in stone.
Marty’s company had no time to wait with other projects lined up and needing to be completed soon. However, they couldn’t be completed unless he had the means to hire more workers and purchase new machines to keep up with the timelines in place.
Marty Joins Forces with Excel Capital
To the Average Joe, these type of accounts receivable amounts seem amazing, but in the construction business, we know this revenue doesn’t always reflect the tangible finances.
Most, if not all, of the money is put back into the company to complete ongoing projects.
Whether Marty could wait until his own payday or not– he needed working capital now.
After supplying us with bank statements, a business lease, his driver’s license, and a few other minimal stipulations, we were able to get Marty $80,000 in working capital in a matter of only two days!
The daily repayment amount was only $400, an ACH automatically debited (so Marty wouldn’t have to worry about making any large monthly payments, he could focus on his projects at hand) which would happen over the course of 12 months.
It was as simple as that! No hassles or phone calls from banks, just fast funding, easy communication, and transparent terms. And, most importantly, peace of mind.
Get a General or Commercial Construction Loan with Excel Capital
At Excel Capital, we know that getting the funding you need is critical to completing bigger and bigger jobs and keeping your business going.
Reach out to the Excel team to find out if you qualify for a construction loan as well as to discover your options.
Apply for a construction business loan from Excel Capital: