No matter the size of your construction business, you will eventually need to expand your business. One way of turning this into reality is by applying for one or two business construction loans. This will help you accommodate more clients and job sites.
As you might know, easy access to additional capital is essential in construction. Moreover, the speed at which you can acquire funding and the growth equity access are also important considerations. That is if you want your business to flourish.
Financial management is important in every business, especially in construction companies. Since every project requires them to spend a significant amount of money, they need to better control their finances. This way, they won’t have to worry about facing cash flow issues in the future, or ever.
With this in mind, here are three loan programs you can take advantage of. Each will help you take your construction business to the next level.
Equipment Financing
Equipment financing can come in handy for contractors whenever they need to replace or acquire new equipment for their business. As an assurance, the equipment purchased serves as the collateral for your loan.
Financing equipment out of your pocket can be expensive and can create a massive gap in your working capital. This can lead to cash flow issues that may be difficult to remedy.
This type of financing is suitable for large businesses that cater to a wide variety of big-time projects such as hospitals or schools. The construction company might need to add a bulldozer or some other heavy equipment to make their services efficient.
They may also need to upgrade their office technology to better manage their booking, estimations, and projects. Without proper financing, all these would be impossible. With equipment financing, on the other hand, contractors can acquire equipment and improve their services.
Business Line of Credit
Another type of loan you can easily apply for is the Business Line of Credit (LOC). It works similarly to a credit card, where you can withdraw cash advances as often as needed. The cash you get from your line of credit can help supply the needs of your growing construction business.
This is an excellent option for contractors who need immediate financing so you can cover the expenses for your new project. The benefit of LOC is the borrower only pays the interest for the credit that they have used.
The business LOC is a popular loan program for numerous contractors because of the availability of funds whenever they’re in need. This decisive factor speeds up the acquisition of financing for new projects because you can easily access your business LOC.
This lessens the need for contractors to apply for additional funding, which can lead to them being buried in debt.
Invoice Financing
Invoice financing is a popular choice of financing for contractors as it allows them to sell their pending invoices in exchange for upfront financing. Lenders can give you up to 80% or 90% of the total value of your invoices, and once your customer pays their dues to the lender, you’ll receive the remaining percentage minus a small fee.
Much like a business line of credit, you can take out cash whenever you need as long as you submit your customer’s invoices as collateral.
This type of loan is highly recommended for large construction companies that regularly receive large amounts of customer invoices.
For instance, contractors often bill their clients monthly or once every two months, so whenever you need a fresh injection of capital to complete or begin a new project, you can use invoice financing as a vehicle for generating funds required in advance. At the same time, you wait for your customers to remit payment to you.
With invoice financing, your credit rating is not an issue. Lenders are more concerned with your customers’ creditworthiness since they’re the ones paying the invoices. This makes invoice financing perfect for construction companies that are new in the business.
Business Term Loans
When construction companies apply for business term loans, they’ll be given a lump sum of money that they can pay back in installments. Depending on the terms of the loan, the repayment period can go as long as 25 years. However, qualifying for term loans may not be that easy.
Term loans can offer a lot of benefits for small to medium-sized construction companies. But if your business hasn’t established a credit background yet, it may be harder for you to qualify. Ideally, companies should be up and running for three years at a minimum.
They should also have no history of foreclosures, bankruptcy, missed payments and should have a credit score of 580 or higher.
SBA 7(a) Loans
The Small Business Administration (SBA) made the SBA loans in the hopes of helping small businesses, including construction companies, secure funding. The SBA guarantees a portion of the loan amount, usually up to 85% to 90% depending on your qualifications. This guarantee reduces the risk to the lender, incentivizing them to extend SBA loans to small business owners.
Among the many SBA loans, the SBA 7(a) loan program is the most popular among small businesses because of its flexibility of use and affordable terms and rates. SBA 7(a) loans are best for established construction companies that need general financing. Companies that have been in business for more than two years and have strong financials might qualify for an SBA loan.
SBA CDC/504 Loans
An SBA CDC/504 loan is another type of SBA loan suitable for construction companies – specifically those that need financing to fund fixed assets. Once you qualify for a CDC/504 loan, lenders can give you up to 90% of the total cost of the asset with repayment terms of up to 25 years.
You can use the money to buy equipment or machinery, remodel your office, build new facilities, and more. However, keep in mind that CDC/504 loans can only be used for fixed assets, net working capital.
Apply for a Construction Loan Today!
Construction businesses remain to be a lucrative industry. Every year, many construction companies are open in the hopes of making it into the industry. However, without the right construction loans, it could be harder for them to finance their operations.
If you own a construction company, you should understand that running one doesn’t come cheap and entails a lot of responsibility. Challenges and obstacles will always come your way and you have to be creative in how you’ll deal with those. It goes without saying that you’d need additional funds to resolve the issues. That’s why you should always consider applying for construction loans even before the need arises.
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