For construction companies and contractors, the financial burden of a construction project is often one of the biggest risks. Loans can help, but generic financing options can be hard to understand, secure and navigate.
That’s why it’s critical to have a thorough understanding of how construction business loans work, how to prepare for the process and how to set your application up for a successful approval.
Construction business loans are designed to provide financial support specifically for construction companies and contractors.
These loans are typically short-term and help cover the costs associated with construction projects. Commonly covered expenses include:
Materials
Equipment
Labor
Permits
A construction business loan is approved based on the value of the construction project – taking into account potential revenue and profitability. This differs from construction loans for homeowners, which are approved based on the value of the property.
What are the different types of construction business loans?
There are many different types of construction business loans. Knowing the basics of each of them can help determine the right loan option for your business’s financial situation and upcoming project needs.
Commercial real estate loans
These loans are typically used by construction businesses that want to purchase or refinance commercial properties. Some examples include office and retail buildings, apartments, hotels, gas stations and data centers. Commercial real estate loans are flexible and can be used for purchasing, refinancing, renovations, expansions, land acquisitions and more.
Equipment financing
These loans are dedicated to cover specialized construction equipment financing. Some examples include renting or leasing excavators, bulldozers and cranes. These loans help construction companies expand their capabilities and execute projects, without making big-ticket purchases outright.
Working capital loans
These loans help construction companies cover day-to-day operational expenses. Some examples include payroll, materials and subcontractor payments. These loans are helpful in covering expenses, especially in the time between work completion and client payments – and maintaining critical relationships in each area through even faster payment methods.
Construction-to-permanent loans
These combine characteristics of construction loans – which cover the construction phase of a project – with permanent financing, which provides long-term funding after the completion of a construction or renovation project. This helps simplify loan management for construction businesses.
SBA loans
Construction businesses can take advantage of certain loans offered through the Small Business Administration. Some examples include 7(a) and 504 loans, which provide different benefits to businesses (the former can be used to cover a wide range of business activities, such as debt refinancing and equipment purchases, while the latter are primarily focused on financing real estate and equipment). These types of loans, along with loans and grants by state and local agencies, are government-backed.
Before pursuing a loan option, it’s important to consult with a financial adviser or loan specialist who can provide more specific insight, context and guidance to address your financing needs.
Why consider a construction business loan?
There are several benefits to leveraging a business loan for construction. Financing helps ensure your company has enough working capital to operate while protecting your cash reserves. Plus, it can also help you take on even larger – and more lucrative – projects than your business might otherwise be able to.
Here are some key benefits to keep in mind when considering a construction company business loan.
Cash flow management
Cover the upfront costs for materials, equipment and labor while preventing delays in project completion
Business expansion
Provide the capital needed to invest in new equipment, additional staff, new branches and other areas to increase revenue potential
Competitive edge
Invest in your construction business with efficiency-driving technologies, specialized training and other areas that give you an edge against your competitors in the market
Project flexibility
Cover unexpected expenses and accommodate fluctuating project timelines without having to make budget cuts
Tax benefits
Reduce your overall tax liability for your construction company with tax-deductible interest payments where applicable
Relationship building
Build relationships with lenders while also building credit history – using smaller construction loans can help in securing larger loans down the road
Financial stability
Provide a safety net of operational finances even during changes within the construction market
Do I qualify for a construction business loan?
Although it’s important to consult with a financing adviser or loan specialist on the specifics of any potential loan request, there are several general factors you can use to gauge your business’s eligibility for securing financing.
1. Credit score
Your business’s credit score is an indicator of how likely the company is to repay the loan. A higher credit score improves your chances of qualifying.
2. Financing history
Lenders also evaluate a business’s financial history, looking at business revenue, profitability and construction cash flow. This analysis helps prove the business is able to generate enough income to repay the loan. Be prepared to supply financial statements to help any lenders assess your financial stability.
3. Collateral
Collateral is often used as security for the lender when considering construction business loans. Examples of collateral can include real estate, equipment or other assets that the lender can gain ownership over if the business defaults on the loan.
4. Business plan
Lenders typically review your goals, strategies and projected financials to ensure the project will be profitable and the loan will be repaid. Be prepared to go over the construction project in detail with thorough plans, estimates, timelines and other documentation.
5. Industry experience
Some lenders may consider your longevity in the construction industry as a factor for loan approval. If the business has demonstrated a successful track record with similar projects, your loan eligibility could improve.
6. Debt-to-income ratio
Lenders look at this metric to gauge loan risk. Typically, a lower debt-to-income ratio indicates a company is better equipped to manage additional debt, increasing the chances of approval.
How to successfully apply for a construction business loan
Use a loan calculator tool to gauge your potential financing needs and interest payments.
Prepare documentation
Gather financial documents including tax returns, financial statements and bank statements.
Assess creditworthiness
Check your business credit scores to ensure good standing and address any negative issues on your credit report, such as outstanding debts.
Create a business plan
Develop a detailed plan that highlights your business’s project scope, timelines and financial projections.
Secure collateral
Identify assets that could be used to secure the loan, such as property, equipment and vehicles. This may include appraising those assets for accurate valuation.
Compare lenders
Research and compare different lenders to find the best terms and interest rates for your business needs.
Better construction business loan options with Buildertrend
Speedy process: Buildertrend Financing provides the ability to bypass many of the tedious processes associated with traditional bank financing, specifically in application and approval time. This helps your business access the funds you need faster.
Custom loan offers: Buildertrend doesn’t approach financing with a one-size-fits-all method. Each loan can be customized to fit your needs, whether it’s for last-minute runs to suppliers, for financial coverage to bridge the gap between projects or for any specified construction draw processes.
Optional inspections: When you’re a trusted builder of the Buildertrend solution, Buildertrend enables you to skip inspections before receiving funding.
Homeowner options: Buildertrend also has methods to help your business offer financing to clients. This helps make payments more manageable for your clients while winning your business more jobs.
The approval time for construction business loans can vary depending on the complexity of your application and the documentation you’ve provided. Often, the process can range from days to weeks, depending on the lender.
When applying for a construction business loan, you’ll typically need financial documents such as tax returns and bank statements, as well as a business plan including timelines, scope of work and projections. Specific requirements may vary by lender.
Construction loans can cover a wide array of business needs. Common inclusions are project costs, equipment purchases, working capital, business expansion and cash flow management. Be sure to talk with your own financial and financing advisers to discuss your specific financing needs and any applicable restrictions.
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