A Contractor’s Guide to Financing Commercial Construction with Business Loans

Whether you’re starting your own construction business or you’ve had one for many years, you might need to borrow some money for your company. Contractor loans are specifically designed for construction companies or folks who want to buy land for construction projects.

If you’re exploring financing options as a contractor, consider contractor loans for your small business.

What are contractor loans?

There are a few different types of construction loans, including those for homeowners building on a plot of land and contractors using funding for various home improvement or building projects.

Construction loans for contractors, or contractor loans, offer financing and loans for contract workers. Lenders offer borrowers — usually businesses or owners — capital to cover expenses and needs at a lower interest rate than a credit card.

Even though contractor loans are an option for commercial construction companies, homeowners can use construction loans to build a home from the ground up or as a home improvement loan. In most cases, you can convert a construction loan to a traditional mortgage, but it depends on your lender and the terms you agreed to in your original contractor loan.

What are contractor loans used for?

For general contractor loans, you can use construction loans for a few different needs, like:

• Covering upfront costs or a down payment for construction projects
• Buy necessary equipment and supplies for larger projects or needs
• Working capital for everyday operating expenses
• Payroll, labor, or hiring and onboarding new employees
• Bidding on a project
• Starting or expanding your business

If you need to borrow money for your general contracting business, contractor loans are a short-term financing option for small businesses and contract workers.

How do contractor loans work?

Most traditional loans work by lenders approving a lump-sum amount and borrowers repaying that loan over a series of monthly installment payments that include the principal and interest rate. However, contractor loans and construction loans for contractors work slightly differently.

Contractor loans are short-term loans — usually a year or however long the contract lasts — and interest rates tend to be higher than traditional mortgages. Rather than a lump-sum payment, lenders give multiple advances through contractor loans as needed during the construction process. Once you meet specific goals or milestones in the construction project, you can draw more money from your contractor loan. You’ll need to submit supporting documents and materials to prove you’ve met the associated deadlines to get your funding or next round of payments. This is also called a “draw schedule.”

Monthly payments start anywhere from six to 24 months after making the first advance. Interest rates vary based on the home improvement project or other expense you’re using the money for, along with other factors.

Each lender has different repayment terms and collateral requirements. If you’re using an equipment loan, you might be required to put the piece of equipment you’re purchasing or leasing up as collateral until your loan is paid in full. Other contractor loans might not require collateral and are unsecured small business loans. For those, lenders approve borrowers based on:

• Business credit score and history
• Personal credit score and history
• What you’re using the loan for
• Your loan amount and how much money you need to borrow
• Your business’s cash flow and how you make money

While your business credit impacts your approval process, your personal credit also plays a role. There’s no set standard that all lenders follow, so getting quotes from multiple financial institutions helps you compare different financing options.

How to qualify for contractor loans

Getting contractor loans or construction loans for contractors depends on a few different factors, including how long you’ve been in business, your project needs, and the type of loan you’re looking to borrow. Construction loans are a little different for homeowners looking to cover a remodel or renovations. There are a few financing options for general contractor loans and construction loans for general contractors.

Different financing means different eligibility requirements. But in general, you’ll need a few supporting documents during the application process, like:

• Information about your company, like how long you’ve been in business, incorporation paperwork, headquarters, and more.
• Banking information, like bank statements and transaction activity.
• Your approval to run a personal credit report and a business credit report, if available.
• Tax returns for your business for the last few years and, in some cases, personal tax returns.
• Financial statements, like your profit and loss statements and balance sheet.
• Revenue projections, annual reports, and updated business plans.

If you’re using the funds for equipment or other types of secured funding, you might need to provide the value of those assets during the application process. Asset values may impact how much your loan approval will be.

Alternatives to contractor loans

If you don’t qualify for contractor loans or you’re looking to compare other loans for contract workers, you have a few loan options available for contractor financing.

Personal loan

If your business doesn’t have enough experience to qualify for small business administration financing — or an SBA loan — you may want to look into a personal loan.

Repayment terms tend to be longer than contractor loans, so if you want to find loan programs with lower monthly payments, you may want to explore personal loans. You’ll need a strong credit score and history to get approved. Or you’ll need to find a cosigner with excellent credit willing to sign onto your loan with you.

Line of credit

If you’re trying to get your construction business off the ground but don’t know how much you need to cover all your costs, try a personal line of credit. You can make withdrawals when you need to and only pay back what you borrow. You can use a personal line of credit for nearly anything, including building a business from scratch.

If you have a solid credit score, you should easily qualify for a personal line of credit, even if you use the funds to cover business expenses.

If your business has some standing, you can explore a business line of credit. These work like a personal line of credit, but it’s under your business, not you.

Credit card

Consider a business credit card for smaller expenses that you expect to repay within a few weeks. Credit cards tend to have one of the highest interest rates out of all of your lending options, so carrying a balance means you’ll pay a lot more in the long run when you factor in interest payments.

If you qualify, look into business credit card options that reward businesses for certain purchases, like buying at specific stores and retailers. Or find one that has high cash-back offers, which helps offset the cost when you use your card.

If you don’t qualify for a business credit card, consider opening a personal credit card that you only use for business transactions while you’re building your business. You can still qualify for one offering cash back or other rewards. This way, you’ll avoid mixing personal and business transactions when you use a dedicated card for your construction business.

FAQs for contractor loans

Can I get a loan as a contractor?

There are a few contractor loans available, depending on your needs. You can get construction-only loans, renovation construction loans, and construction-to-permanent loans. Different lenders offer different construction financing options.

What loan options do independent contractors have?

You can explore commercial construction loans through a traditional bank or credit union. You can also apply for SBA loans, which are loans backed by the Small Business Administration.

Is it harder to get a construction loan?

If you’re just starting your general contractor business, it might be harder to get a construction loan compared to a personal loan if you don’t have any business credit history yet. But if you’re operating an established company that’s earning money and can prove income, you should be able to get construction loans for general contractors.

Can my LLC get a construction loan?

LLCs qualify for contractor loans and other business loans through traditional banks, credit unions, and private lenders. Eligibility varies by lender, so you might be eligible for contractor loans through one financial institution and not another. Compare all your choices to determine which offers you the best options.

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