The Great Recession caused major declines in America’s construction business by the time it ended in 2009. But, according to PBS, it’s been slowly returning back to life over the last couple of years.
This multi-billion dollar industry can be exciting and lucrative for prepared contracting and construction companies. Yet, small business owners in need of commercial financing risk losing everything they’ve worked for if they don’t have the capital needed to succeed.
To launch and complete a successful construction project, you need a considerable amount of capital to back you up. Very few have gone on to become industry leaders without access to financing products like bridge loans, lines of credit, and construction loans.
What Is a Construction Loan & Why Do You Need One?
The main purpose of a construction loan is to finance the building, expansion or renovation of a home, housing community, commercial property or other real estate project. It is generally short-term financing issued by a bank or private lender. However, some lenders also offer long-term construction financing as well.
Contractor loans are not just for building. They can also be used to purchase building materials, construction equipment, even hiring and paying employees and vendors. Anyone involved in managing a construction project, whether they’ve invested money or time, can apply for this form of commercial financing.
This can be a contracting company or single contractor, individual homeowner, team of builders, real estate investors or other type of small business owner. Either way, a commercial loan can help you launch your construction project, and keep it flourishing to completion.
Commercial Financing: 9 Reasons for Getting a Construction Loan
There are numerous reasons why people seek commercial financing to fund various aspects of construction projects. Here are some common and not-so-common reasons why small business owners turn to construction loans for project financing:
1. Building New Homes
If you’re a contractor in need of capital to build a new home for your client, a short term construction loan could be the right answer. Use this type of small business loan to construct new buildings, including custom homes in new communities. Once the project is complete, if you choose to buy the property yourself, your lender can refinance the construction loan into a home mortgage at a better interest rate.
2. Buying Real Estate
As a contracting business grows, so does its real estate needs. You may want to purchase a piece of real estate property to launch your brick and mortar storefront. Or perhaps you need a private warehouse space to house your own supplies and inventory. Some small businesses even purchase real estate to provide affordable (even free) housing for employees during big, important jobs.
3. Upgrading & Expanding Property
Already have a physical location but looking to expand, upgrade, remodel or improve the property? With a commercial loan, you can construct a brand new office space to house your growing sales team. Or, simply gut and remodel the current one, and possibly add a few hundred square feet of space and expand.
4. Acquiring Materials, Equipment & Inventory
Larger construction projects require having larger quantities of high-quality equipment and materials always on-hand. It takes capital to finance the items you need to keep the project afloat during the long-haul, and still keep up with operational costs. Use a contractor loan to buy or lease inventory needed to complete the project.
5. Hiring & Training Employees
Each construction project requires contractors to get the job done. And, there are still other employees you need to hire, such as human resources specialists, accounts receivable agents and office assistants, to help the project run smoothly. Use these business loans to cover hiring costs, as well as for training and educational costs for you and your employees.
6. Disaster Relief
When natural disasters strike, local businesses are impacted just as much as the people in the community. Yet, those communities need their businesses to return and thrive. It takes capital to bounce back from damaging hurricanes and earthquakes, as well as disastrous fires. Construction loans allow small companies to make the repairs needed to open back up for business fast.
7. Financing Vehicles
You many need to buy just one truck, a tractor or tow or an entire fleet of company vehicles. Some businesses choose to lease vehicles, while others want to own them outright. Either way, you have options with a small business commercial loan. Depending on the lender, you may get a cash loan to purchase the vehicles outright, or they may finance them for you.
8. Fluctuating Cash Flow
Unstable cash flow is one of the most common reasons small business owners try to obtain financing. Commercial loans help fill in when business is slow, and money is tight. For example, many small contracting companies see declines in business during rainy seasons. However, it still takes cash to keep the company running until business picks back up again. Small business construction loans help, so you avoid overdraft fees and high-interest payday and car title loans that barely keep you above water.
9. Growing Your Construction Business
If business is going well, you’re probably dreaming of the day when you can take your company to the next level. You may want to transform your branding, improve services and products, or expand your target market. Construction companies use commercial financing for diversifying and investing in other companies, as well as franchising their businesses. How are you planning on growing your business?
3 Types of Commercial Financing for Contractors Seeking Loans
There are numerous types of loans for small businesses seeking funding for construction projects. Most of them fall within three basic categories:
1. What Is Asset Based Lending?
As suggested in the name, an asset based loan (ABL) is a form of business lending that uses the company’s assets to secure the financing. In many cases, ABLs act much like revolving credit lines.
Asset based loans allow you to continuously borrow against the business assets to pay for investments or expenses when needed. What are business assets? This could be anything from computers to vehicles to stocks and bonds.
5 Types of Asset Based Commercial Financing
Accounts Receivable Financing – This is essentially a line of credit for small businesses. That means the funds are there when you need them. Pay off the debt early with no prepayment penalties, with no collateral needed.
Property Finance – Get a loan for your construction building project by using your own personal or business property as collateral. Borrow up to 85% (many cases) of the value of the property.
Equipment Leasing & Financing – Use this type of asset based loan to purchase landscape, industrial and construction equipment, even commercial vehicles. You can also purchase smaller equipment such as computers, office supplies and printers. Just keep in mind that if you get an equipment loan, the lender expects you to use every penny of it to purchase equipment and machinery for your company or a specific building project. Getting equipment financing can be much simpler than other types of financing, as the equipment acts as collateral in some cases. If you don’t pay the debt back as promised, the lender can simply take possession of the property to recoup their losses.
Inventory Financing – This can also be structed as a revolving line of credit for your business. Or, you can get inventory financing in the form of a loan. Leave the money available when you don’t need it, so it’s there in case of an operating emergency. Withdraw funds as needed, without worrying about prepayment penalties.
Luxury Asset Loan – What are luxury assets? This can be anything from a valuable diamond necklace to a classic vintage car. Borrow against these luxury assets to finance your construction project, using them as collateral held in the lender’s secure holding location throughout the life of the loan.
2. What Is Invoice Financing?
Invoice financing is much like asset based lending. The big different is your company’s unpaid accounts receivable are used to secure the loan instead of physical assets.
In some cases, even good customers take their time paying outstanding invoices. This type of asset-based small business loan allows you to borrow against slow-paying customer invoices or sell them in bulk to a lender who specializes in financing invoices.
That way, your slow-to-pay clients don’t leave you strapped for cash, bringing your construction project to a halt.
3 Types of Invoice Financing for Businesses
Invoice Financing – With invoice financing, you borrow up to 90% of the value of a client invoice up front. Then, after the client pays off the invoice, the lender sends you the remaining 10% less fees. The lender takes over the burden of tracking the accounts receivable, dealing with client statements and any other necessary collections processes. That way, you’re continuing to work on completing your construction project instead of chasing paperwork and payments. You’ve already been paid.
Purchase Order Financing – A similar type of business loan for contractors is known as purchase order financing. With this lending feature, you borrow up to 75% of the sale price on the purchase order. To qualify for this type of commercial loan, the creditworthiness and financial stability of the business placing the order with your brand is more important than that of your company’s credit and finances. Many lenders suggest purchase order financing for construction companies that are startups or don’t have good credit established already.
Import-Export Financing – Looking for financing options for a contract dealing with a foreign vendor? With import financing, you can get a letter of credit from your lender. It guarantees the vendor will get paid immediately once you receive the goods. You get the supplies you need for your building project. The vendor gets paid, with nothing coming out of your pocket right now.
3. What Is a Business Loan?
A business loan is funding provided by a bank or lender to be used for stated business purposes. You are acquiring debt, which you have to pay back within a certain amount of time with interest.
Use your small business loan to hire staff, buy machinery or anything else you may need to grow your business.
4 Types of Small Business Loans
Term Loans – For businesses in need of capital, a term loan allows you to borrow what you need now. Then, pay it back in regular payments for an agreed upon amount of time. Term loans are charged interest rates that are added to the original loan balance.
Lines of Credit – This type of commercial financing is a very flexible way to prepare for the future. Whether it’s an unexpected emergency or a lucrative opportunity you just can’t pass up, a line of credit is the way to go. Once approved, you pay for the capital you use only for the time you use it with no prepayment penalty.
SBA Loans – Short for Small Business Association loans, these are guaranteed by the US government. They come with repayment schedules generally longer than traditional loans, along with lower interest rates. SBA loan application and acceptance processes are known to be very intrusive. The process of getting approved is lengthy and frustrating to many startups but can be worthwhile.
Merchant Cash Advance – This is not an actual loan, but an agreement between you and a merchant cash advance company, where you agree to sell your future receivables at a discounted price These types of working capital solutions focus more on your company’s cash flow as opposed to collateral or credit ratings.
For many small business owners, traditional loans just aren’t reliable options. Most of what banks offer in terms of business financing are for well-established companies.
Looking for commercial funding for your construction project? Not sure exactly what type of small business loan is best for you?
AllFi offers a wide-range of commercial financing options for contractors. From the credit-worthy to the credit-challenged, with or without collateral, we can help.
Call us at (888) 624-9566 to speak with one of our small business financing specialists. Or click here to apply for a construction loan online now.