For most small construction businesses, getting a loan for your construction company or opening a line of credit seems like an inevitable part of your entrepreneurial journey.
While it’s perfectly normal for businesses to take out loans, it might be challenging for new or small business owners. To help you ease your financial woes, here are a few tips on how to secure a loan for your construction company.
Familiarize Yourself With the Loans Available
Since construction is often considered as one of the riskiest industries to start a business in, it is difficult to secure traditional loans from banks. Aside from favoring the large and established firms, they have a lot of tedious processes, not to mention the negative impact they immediately have on your business credit score.
Still, there are different kinds of loans available: some are for businesses in general while others are specific to certain criteria like industry or business sizes. Being familiar with the small business construction loans available for your company gives you an edge and will help guide your future plans and preparations. To start, here are some of the loan options available:
The US Small Business Administration (SBA) was created to help small businesses, construction companies included. However, the SBA loans do not provide you with funding from the government agency itself. Instead, they act as a guarantor – connecting borrowers like you to lenders who are willing to finance your needs. The SBA in this case acts as the guarantor, covering up to 85% of the business loan depending on their terms.
Working Capital Loans
For construction companies in general, projects are rarely in steady supply throughout the year. To help make you through dry seasons, you can apply for a working capital loan. This type of loan is particularly used to help finance your everyday operation such as payroll and utilities. Similarly, you can use it to prepare funds for an upcoming project. These are generally short-term financing solutions, with payment terms varying from lender to lender.
Business Line of Credit
A business line of credit is an important tool for any business to have. In a risky and volatile industry like construction, you’d want to have a line of credit for your construction company. This allows you to borrow from a fixed set of funds, determined by the lender based on various factors relating to your company. As a form of a revolving fund for your business, once you return what you borrow, you can start taking out funds from the line of credit again.
Business Equipment Financing
If your construction company requires specialized equipment currently out of your financial means, you can always look into business equipment financing options. From power tools like table saws to heavy equipment like loaders and mixers, you can purchase them through this option and pay it in small increments over time. This is easier to obtain than other options in this list, mostly because the collateral is the very equipment you borrowed for. Once you finish payment, it’s all yours.
Prepare Your Loan Application
To apply for business construction loans, you have to know what you’re getting into. Remember to only borrow for what you need and what your company can afford to pay. You might want to review your financial statements to see how much monthly installments you can commit to a loan. Of course, it’s possible to request for a sample computation from your preferred lenders to see the payment terms and schedule should you take their offer.
Next, understand the main considerations examined by most prospective lenders. If you’re planning to take loans soon, prepare all relevant documents to make it easier for the lenders to examine your performance. Meanwhile, if your plans for a loan are still far down the line, you might want to check your records and try to improve on the following factors:
- Business credit history. Most lenders require a certain credit score to consider your company for a loan. If you’re still below the target, there are proven ways to improve your business credit score.
- Cash flow history and business projections. If you still have your financial records, complete with all attachments (IRS forms, invoices, receipts, etc), then you’re good to go. Usually, business projections are a combination of historical data and overall industry projections.
- Collateral. From the lender’s perspective, what can they leverage in case you default on your loan. These are assets such as equipment or land that can be liquidated to complete your loan commitments.
- Capital. Simply put, the larger contribution you can offer for your loan is often seen by prospective lends as an indication that you can indeed pay for the rest of the amount borrowed.
Once done, you can start filling out forms and applying for a loan for your construction company. Nowadays, there are online platforms that can help you find a suitable lender. You have to register with them and submit the required documents. Then, you just have to wait for offers from interested lenders. This gives you the opportunity to choose for the best offer. You might want to check the payment terms and the speed and convenience of the loan processing.
Setting up a construction company is a challenge in itself – managing and keeping a business afloat in a volatile industry. However, it is not impossible, as countless others have already succeeded in this field. Being aware of your options and knowing how to get them can be an important card that can spell the difference between your business making it through the industry or folding up. Loans, when handled responsibly, can be an asset that can speed up the growth of your construction company.