Funding Construction Businesses with Small Business Loans: The Complete Guide

Discovering Business Loan Options in the Construction Industry

Contractors, construction firms, equipment manufacturers, suppliers, and more may opt for the following small business loan options:

1. Term Loans

For large expenses related to working capital, equipment, payroll, compliance, and more, businesses may rely on term loans. These provide an upfront lump sum amount to cover all such expenses. Repayment is done over a specified period of time, which can either be long term or short term, and at a pre-specified interest rate. By providing some collateral or down payment, business owners can secure better interest rates. However, approvals depend on many factors along with the collateral.

Key Features of Term Loans:

• Offer an upfront lump sum amount

• Can be used to cover multiple business expenses

• Available with both fixed and variable interest rates

2. Commercial Real Estate Loans

For purchasing a commercial real estate property for business use or renovation, like a shopping district, mall, office space, restaurant, hotel, and more, owners may rely on these small business loans. These usually are long-term loans with a significant loan amount to help you cover a major portion of the cost. As the LTV might be lower than the total value of the property, you might need to pay the remaining amount as downpayment. Business owners can also refinance these loans or get a two-time closing. With a two-time closing, owners can select a separate loan to mortgage their property and expect to secure better terms when the renovation or construction work is complete.

Key Features of Commercial Real Estate Loans:

• Higher loan amounts

• Longer repayment tenures

• Secured loans where the financed real estate protects other business assets

3. Construction Loans

One of the most useful small business loan options for contractors and construction industry startups, these loans provide the funds required to build a new construction. Loan amount is disbursed in a draw format, based on the various milestones. For example, site preparation and excavation can be two different milestones. These may also have a two-time closing or interest-only repayment schedule.

Key Features of Construction Loans

• Short term loans (usually last till the completion of the project)

• Follow a milestone-based draw schedule

• Higher interest rates because of shorter tenures

4. Equipment Financing

Suppose you need multiple excavators, rollers, or lifts for a construction project but leasing or renting is turning to be an expensive affair, you may rely on equipment financing options. In these loans, you can purchase essential construction equipment at the fraction of the cost and use the same for your project. The interest paid on these loans may be tax deductible, reducing your overall tax liability. However, consult this first with a tax expert before making any decision.

Key Features of Equipment Financing

• Available as both long term and short-term small business loans

• Secured loans where the equipment serves as the collateral

• Possible tax benefits

5. Invoice Financing

Payment cycles in the construction industry can be quite long. Some businesses operate on Net-30 or Net-60 terms, which can lead to gaps in cashflow. Likewise, there can be a gap in the draw schedule as well. To overcome such gaps, construction businesses can get faster access to capital with invoice financing. This includes securing a loan against your pending invoices. Along with the borrower’s credibility, the overall reputation of the client also matters in this loan.

Key Features of Invoice Financing

• Are usually short-term loans

• Have high interest rates

• Future receivables serve as collateral

6. Business Line of Credit

The construction industry is seasonal and vulnerable to various factors. You may not know when a major expense can occur. Upfront small business loans may not be enough to tackle such situation. Instead, it is better to rely on revolving credit line. If you’re approved, you’ll be able to withdraw as much as required from your credit line and can conveniently pay it back. Interest is only charged on the amount you withdraw.

Key Features of Business Line of Credit

• Provides continuous access to funds

• Only pay interest on the amount you withdraw

Government-Backed Small Business Loan Options

Federal and state governments also work in conjunction with various lenders to simplify small business lending. While a few small business loan programs are suited for all industries, others are also dedicated to the construction industry. A few popular options to explore are:

1. Small Business Administration (SBA) Loan Programs

The U.S. Small Business Administration offers partially guaranteed small business loans. Construction businesses can also apply and may be able to qualify depending on their financial history and overall credit worthiness. These loans are offered with the help of both profit and non-profit lenders, and the SBA only guarantees the loan.

Here are some useful SBA small business loan options for construction businesses.

• SBA 7(a) loan program: Up to $5 million, for managing working capital

• SBA 504 loan program: Up to $5.5 million, for making asset-based purchases like heavy equipment, commercial property, and more

• SBA Working Capital Program (WCP): A funding option based on revolving credit line for various purposes

• SBA Microloans: Loans up to $50,000 for managing smaller expenses

2. State-Facilitated Loan Programs

State governments also assist business in obtaining small business loans for various contract work. Some examples are:

1. State Small Business Credit Initiative (SSBCI) Programs

2. State Housing Finance Agency (HFA) Participation Loans

3. State and Municipal Contract Financing Funds

4. State Infrastructure Banks (SIBs) small business loans

How to Use Small Business Loans for your Construction Business

Securing external capital allows you to manage uneven cash flow cycles while funding your immediate site operations and project expenses.

• Purchase heavy machinery like excavators or dump trucks to expand your field fleet capabilities.

• Buy raw building materials for new project starts when supplier prices drop.

• Cover weekly payroll expenses during slow billing cycles to keep your crew intact on the job site.

• Fund upfront mobilization costs before client deposits clear to avoid project launch delays.

• Bid on larger commercial or municipal building contracts with verified financial backing.

• Upgrade outdated safety gear and employee field equipment.

• Secure temporary warehouse space for storing bulk inventory away from the elements.

• Manage immediate overhead costs during seasonal winter slowdowns when client work decreases significantly.

Eligibility Criteria for Securing Construction Business Loans

Meeting lender requirements helps you qualify for the capital needed to support your daily operations and long-term growth.

• Credit score: Lenders usually prefer a score above 670, which falls under the ‘good’ range as explained by Experian. Your personal credit history reflects your past debt repayment habits.

• Business age: Most financial institutions require at least two years of continuous operations in the building sector.

• Annual revenue: Your company needs verifiable yearly sales to prove you generate consistent cash flow. This can be proven through profit and loss statements, tax returns, and bank statements.

• Debt to income ratio: Lenders look for a ratio of 35% to ensure your company handles new payments.

• Collateral availability: You might need to pledge equipment or real estate to secure the financing package.

• Industry experience: In the construction industry, lenders may look for a documented track record of successfully completed projects and contracts.

Conclusion

With multiple small business loans available to help construction businesses, it’s not smart to not leverage them. Be it setting up commercial property, purchasing heavy equipment, preparing construction site, hiring technical assistance, or managing working capital, the funds can be used for various purposes. Some lenders even allow you to choose between fixed interest rate and variable rate to adjust monthly payments. To get the best loan offer, prefer reaching out to multiple lenders and getting prequalified. A simple prequalification may not lead to a credit pull and help preserve your credit score.