Basics about Business Loans for Construction Companies & Contractors
Do you own your own small construction company? Then you know what it’s like to come into a large contract and need new equipment to complete it – but not to have the cash on hand to finish the job. When you’re in the construction business, you get paid at various stages of the job, but a lot of the time those payments come in a little bit late. The problem is that you have to buy the equipment up front, so if there is a gap in your payments, you can run into real difficulties with respect to cash flow.
Financing for construction companies often involves taking out some short-term loans or capital cash advances to pay for equipment and finish a job – to bring in the money that will pay back the loan and give the owner his profit. There are several ways to find business loans for construction, so let’s take a look at some of the most attractive options available to you.
How do business construction loans work in Canada?
Do you have a solid personal credit score? Is your business also sound with its credit? Then you might want to consider pursuing a loan with the bank you already patronize. If you approach a different bank, you will likely get a huge stack of paperwork to fill out, requests for all sorts of documentation, and then – even if your ducks are all in a row – you’ll still have to wait for the bank to sort through the whole application, which can take weeks. In the meantime, your job is sitting there unfinished. That’s no way to run a business, right?
This is one way to up your chances with a traditional lender. If you’re taking out a loan to cover payroll when you start a new job, banks will look at that a lot more cautiously. After all, let’s say you get the loan funded and then you write paychecks to your employees. If the job goes south, you default on the loan. What collateral does the bank have? Zilch. They will sell your loan out to a collector for pennies on the dollar.
How do equipment leasing and financing work?
With some construction businesses, you can’t get your operations up and running without heavy equipment – but the capital costs for those machines are significant. For most new construction businesses, taking out a loan is a requirement. A loan for heavy equipment involves some collateral, and if you default, at least the bank can recoup more of its losses by repossessing and selling the equipment. The good news is that your cost for financing is likely to be lower, because that business collateral gives you more likelihood of approval – and of lower interest rates. You can also use equipment that you already own free and clear as collateral for a new loan (such as that one you might need to take care of your payroll going into this new big job).
Can you use real estate equity to finance business expenses?
A creative way to take out business loans for construction companies is to use equity that you have in a real estate property. This could be your primary residence, your vacation home or a rental property that you own. Obviously, you want to feel confident that your client will pay you for your work in a reasonable time frame, but if you need to take out a loan to cover payroll or other unsecured items, then this sort of loan also offers lower interest rates than unsecured loans, and as long as you stay within the LTV (loan-to-value) ratio guidelines, your approval should come quickly.
What are the most common construction loan lending requirements?
Whether you are looking for working capital loans for construction companies or other types of business loans in this industry, bear in mind that you usually need to 12 months history operating as a business in order to qualify with a non-bank financer, and two to three years depending on the industry. The clear majority of lenders are not looking for start-ups with a shorter business history that as customers.
If your credit is decent, if your business brings in six figures in annual sales, and you don’t have any bankruptcies or tax liens filed against you, another option is a business or merchant cash advance. The terms generally include a maximum of 24 months. The advance is based on a factor rate, as opposed to a interest rate with payment being made based on a percentage of future sales/receivables. The cost of a business cash advance will be higher, in most cases, than a traditional loan, but you also do not face a monthly minimum payment. Instead, you pay back the loan out of your proceeds. If your revenue grows, you pay the advance back sooner, but if revenue remains the same or goes down, you avoid the cash flow crunch that minimum payments can bring. So you are swapping the convenience of percentage-based payments for a higher cost of financing.
Do you have an example of how this type of funding works?
For example, your business requires $100,000. If approved at a 1.3 Factor, the payback amount is $130,000. The funding underwriter determines that your business must payback 15% of your receivables until the advance is paid. In month 1, if your gross sales is $30,000; $4500 (15%) is paid against the $130,000… and so on until the advance is paid.
With this type of arrangement, the approval is based primarily on cash flow of the business. Generally, cash advance providers require at least 3 months of operating history, but sometimes they require 12 months. Also, financials are rarely required, except in the case of business cash advances of $100,000 or greater.
If you are looking for alternative financing to support your construction company’s operations, contact us today. We have helped many business owners in situations like yours and look forward to helping you take your business to the next level.