Construction Business Loans: What You Need To Know

Financial difficulties are part of running a business. Even the most successful construction companies experience a cash crunch every now and then. But despite the lack of funding availability, construction business owners still need to pay for supplies, equipment, payroll, and daily business expenses. When the expenses are too much for your business to bear, it’s time to consider applying for construction business loans.

There are many reasons why construction business owners choose to apply for a loan. Here are some of the most common ones:

Business Expansion: If you’re looking to expand your business by acquiring a new one or by expanding your physical location, construction business loans can help finance your business expansion.
Purchase Equipment and Machinery: With a business loan, you can buy all the equipment and machinery you need to operate your construction business.
Pay for Damage or Disaster Expenses: When commercial properties are damaged due to unforeseen circumstances (earthquakes, flood, or another disaster), you can use the funds you get from a loan to make the necessary repairs.
Hiring and Training Employees: A lot of money goes into hiring and training employees for your construction business. You can use the funds to cover the costs of hiring employees, as well as training and educating them.

5 Types of Construction Business Loans

When applying for a business loan, keep in mind that your business credit history and income are major factors in choosing the type of loan for you. However, bad credit and income history don’t automatically disqualify you from qualifying.

Here are the five most common types of construction business loans:

1. Merchant Cash Advance (MCA)
A merchant cash advance is a great choice for business owners who need immediate working capital. Not a lot of loans can give you cash ASAP, but a merchant cash advance is one of the fastest financing available. However, an MCA is technically not a loan, but instead, it’s an advance against your future debit or credit sales.

2. Business Line of Credit
A business line of credit (LOC) is a flexible type of financing that works similar to a credit card. Once approved, lenders give you a predetermined line of credit which you can withdraw funds from whenever you need to. Additionally, you only have to pay for the money you’ve withdrawn – not the entire credit limit.

Business owners can use the funds from a LOC to cover operating expenses. Contrary to popular belief, it’s best to apply for a business line of credit before you actually need it. It’s important to show lenders that you have a healthy cash flow since it increases the chance of qualifying.

3. Asset-Based Loans
If you have existing business assets, you can leveragethem in order to get the working capital you need. Asset-based loans allow you to do just that – use your assets as collateral in exchange of funding. If you default on the loan, lenders have the right to repossess your asset to cover up the losses.

4. SBA Loans
The Small Business Administration (SBA) created SBA loans to help small business owners secure funding. There are different types of SBA loans depending on the borrower’s need, but all of which are guaranteed by the SBA. SBA loans have better interest rates and repayment terms because of this guarantee.

There are two most common types of SBA loans:

SBA 7(a) Loans can be used for just about any business purpose, such as working capital, operational expenses, purchase equipment or real estate, or refinancing existing debt.
CDC/504 Loans are specifically for purchasing land, buying expensive, long-term equipment, or renovating or improving the property.
If you need immediate funding, SBA loans are not for you because it takes up to 90 days for approval. You also need to meet specific requirements, as well as the standard loan qualifications. In order to qualify, you need to have exceptional credit and your net worth and annual income must fit within the qualifying range, among others.

5. Equipment Lease
With an equipment lease, the leasing company purchases the equipment, and then lease it to you for a few months or years. At the end of the leasing term, you’re given an option to purchase the equipment, continue leasing, or terminate the contract.

Equipment leasing is a great option for construction businesses who don’t want to pay for the full price of equipment, or if you don’t want to purchase equipment you may not need in the future.

4 Factors that Affect Your Business Loan Application

There are different factors that can affect your business loan application:

1. Credit History
Traditional lenders want to fund business growth, rather than help small businesses manage their debt. Most lenders check your personal and business credit, so make sure you have good credit. If your credit is less than desirable, don’t lose hope! There are ways to raise your credit score, such as paying off debt on time, don’t get into other debts, and more.

2. Business Finances
You need to be able to show a steady growth of finances in order to prove that you have the means to pay the debt over time.

3. Profit Margins
The promise of customer payment may not be enough to prove that you can pay back the loan. Another way to prove that you can pay is to secure a stable profit margin.

4. Collateral
Most financial institutions usually ask borrowers to sign a personal guarantee, depending on the type of the loan. A personal guarantee makes the owner of the company liable for the debt. Unless you’ve been in business for a long time or you have a stellar business and credit record, you might be asked to put up collateral.

Construction Business Loans for Your Business!

When it comes to , SMB Compass’s lending experts can help you find the best loan for your business.

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