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Types of Lending for Construction Companies

Construction businesses are in luck. According to the Urban Land Institute (ULI’s) three-year economic forecast there is expected to be continued growth in U.S commercial real estate through 2019. This could indicate heavy work in the coming year for construction workers.

Managing a Construction Business:

Managing the balance between direct costs and overhead costs isn’t easy for any business, especially for those in construction. Covering materials, equipment, facilities, wages, and still saving enough for slow seasons and emergencies don’t spare much margin for profit. All these costs can get overwhelming- that’s where applying for a construction business loan always helps. Construction loans are of various types so finding the right match for your business may be a little bit of a struggle. As your business evolves, you may also require different types of finances at different times.

Types of Construction Business Financing

While general business financing options include bank loans, short-term loans, and medium-term loans, construction financing has options tailor-made to the business. All these loans are suited for different types of businesses and even different stages of a company’s growth. Each financing option also has different eligibility requirements.

1. Equipment Financing: This type of loan requires you to approach a lender with a quote for the equipment you wish to take out a loan against. If approved, you could be given 80%-100% of the cash you need to purchase equipment. The terms of your repayment may generally involve monthly installments, and the life of the loan may depend on how useful your equipment is and value. One unique thing about this type of loan is that the lender takes the equipment as collateral. In case there are issues with repayment, the lender can take the equipment for their debt. This mitigates the risk the lender takes because they’re guaranteed to be repaid whether that’s through your agreed repayment terms or by repossession of the equipment. Since this presents low-risk, lenders don’t mind credit scores or working with newer businesses. Borrowers with the best credit and strong applications are eligible for the lowest interest rates on their loans.

2. Business Line of Credit: A business line of credit is similar to a credit card. Withdraw the money that you need and only pay interest on what you take. However, in case of late payment, your interest rates will increase. These lines of credit are offered based entirely on your business profile and personal credit score. A business line of credit can be of two types, secured and unsecured.

Secured Line of Credit: A secured line of credit means that collateral is taken to back the line of credit. Collateral can include equipment of your construction business, cash inventory, invoices etc. This secures the lender even in cases of high-risk businesses.

Unsecured Line of Credit: An unsecured line of credit means that no collateral would be taken to back the credit. Thus, the lender is taking a risk, and hence an unsecured line of credit would require your construction business to be highly profitable and a good credit score. Generally, unsecured line of credits is given for low-risk scenarios.

3. Business Credit Cards: Business credit cards are used when a construction business would need to oversee employee spending. They are generally used to monitor everyday purchases but require the full amount is repaid every month. This might pose difficulties for construction companies who face large expenses and have to carry their balance month over month. Carrying over a balance may mean paying a lot over time and really hit your cash flow. Paying late could even reduce your credit score. However, there are several types of cards out on the market now and each designed for different types and stages of your business, so read and understand their terms and conditions carefully.

4. Traditional Bank Loans: Commercial banks are likely to offer general equipment loans. A down payment may be necessary. Several banks require businesses to pledge assets as collateral. When you require more financing or when there is a sale of equipment, things can become tiresome. Availing a bank loan would require strong credit and financial history.

5. SBA Loans: Although the Small Business Administration (SBA) doesn’t provide loans themselves, they provide guarantees to other lenders to give you the loan. The SBA also includes microloans for small equipment purchasing (below $50,000) and 504 loans for large equipment (over $10 million) For this reason, a stamp of approval from the SBA is highly sought after. Although the SBA loans are easier to apply for than traditional bank loans, they have a long application and processing time. They require personal guarantees on loans and additional collateral, and if you don’t have a long-standing established business, high chances are you won’t be selected for a loan.

6. Vendor Financing: Some vendors will finance the equipment for you through a partnership with a financial institution to provide credit to the purchaser. These loans are similar to a credit card but can make things frustrating if the principal is not paid within a limited time frame.

7. Alternative Financing Options: This is one of the best options for construction financing and other small business financial requirements. With high approval rates and the ability to have the cash in your account in as little as 48 hours, they address working capital needs for anything you may require. As the financial demand for tools, equipment, supplies, and labor continue to increase with growth in your business, alternate funding platforms like Reliant Funding help ensure you have the right financing when you need it.

Although several financing options could amount to a lot of confusion, understanding what they are and what suits your business best can help save a lot of money as well as a lot of time.

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