How Can a Construction Line of Credit Help my Business?
The construction industry is on track to keep growing, and you want your business to grow with it. Unfortunately, things like high insurance rates, expensive equipment, advertising costs, and licensing requirements can get in the way of your construction company’s growth.
What Is a Construction Line of Credit?
Cash flow is essential to purchase updated tools, pay employees, and respond to invoices on time. If you’re feeling stuck and not sure where to turn, you might consider applying for a construction business loan, specifically, a line of credit. With a construction business line of credit, you can cover cash flow deficits and help your business grow.
Traditional bank loans from a financial institution may be difficult to get as they have strict requirements for contractor lines
The good news is, alternative lenders have come into the market making it easier to get a contractor lines of credit. Applying for a line of credit is easier than you think. Let’s take a detailed look at how lines of credit work and how your construction business can benefit from one.
How does a Construction Business Line of Credit Work?
A business line of credit is one of the most flexible financing options for borrowing money for the construction business. A contractor line is a type of small business loan that works similarly to a credit card, and it is a great option for recurring cash flow issues.
With a line of credit, you can borrow up to a certain amount, "credit limit" of money, and you only pay interest on the amount of funds you actually use. You can draw and repay funds as often as you like, as long as you continue to make payments on time and don’t exceed your credit limit.
For example: If you borrow $100,000 but only use $70,000, interest is paid only on the $70,000 and/or outstanding balance.
Contractor lines have a flexible payment solution-Payments are weekly, bi-weekly or monthly payments. Some have interest only payments feature.
Unlike traditional lenders such as banks, many alternative online lenders will allow you to pay your full balance early to save on the interest costs on a contractor line. Many traditional lenders will penalize borrowers for making payments ahead of schedule because they then lose out on the interest gains.
There is no repayment term limit, and collateral is not required. Credit lines require a personal guarantee.
How Do You Qualify for a Construction Line of Credit, and What Are the Requirements?
Qualifications for lines of credit are less strict than other traditional business loans. Factors such as the amount of time you’ve been in business, business credit score, personal credit score, and your business’s annual revenue all contribute to your company’s ability to get approved for a line of credit.
The minimum qualifications for a Construction line of credit through Advancepoint are as follows:
- At least 6 months in business
- Personal credit history needs to be good, credit score above 600 required
- Average of $200,000 annual revenue
- Satisfactory debt to income ratio
Documents to fully qualify:
- Bank Statements
- Tax Return NOT required under $150,000 credit limit in most cases
Additional documents will help back up your case. Requirements vary depending on the lender, but you may need to provide additional documents to fully qualify.
1. Credit Limit
Credit lines have a credit limit which is determined by a variety of factors including monthly and annual company revenue. Most lines of credit range between $10,000 to $250,000.
2. Credit History
Both your personal and business credit scores are considered. Personal credit history matters and your personal score and credit report takes precedent. Traditional lenders will consider your business credit score more so than alternative lenders so company history matters.
The higher your credit score is, the lower your interest rates will be. A personal credit score above 600 is required, and a score of at least 680 is optimal.
Why a Construction Business Need Line of Credit?: Benefits and Common Uses of a Line of Credit to Grow Your Construction Business
Before applying, it is important for your construction business to identify what it needs financing for. The construction industry is a crucial, but expensive industry.
Contractors often need working capital to grow their business. Let’s explore some of the main reasons construction businesses borrow capital and pursue a line of credit.
Many construction business owners use Lines of credit. The following are popular uses:
- Paying bills (paying invoices)
- New inventory and equipment
- Managing cash flow and day to day expenses
- Emergency expenses
- Business Taxes
- Licensing and permit requirements
- And more!
1. High Material & Construction Costs
Each year, inflation causes the price of materials and other goods to increase. Contractors have no control over the rising costs and must adapt in order to work with it.
Preplanning and anticipating rising costs will help your construction business prepare each year. Having capital on hand will also reduce the shock.
2. Desire to Expand Your Business
Many construction businesses are ready to expand to multiple cities, a new home base location, or a larger service offering. Without a capital buffer, it can be intimidating to take the leap.
3. Hiring Qualified Team Members
Quality contractors can make or break your construction business’s success. Consistency and growth are reliant on high-quality, skilled labor.
Hiring more skilled contractors as your construction business grows costs money that you may not have upfront. But you will quickly become overwhelmed with work if you do not have quality contractors on your team.
4. Delayed Invoices
Whether you are waiting on delayed invoices from clients or struggling to pay them yourself, it is a good idea to take a proactive stance on mitigating potential collection issues.
Benefits of Using a Line of Credit to Grow Your Construction Business
The right business loans can benefit construction businesses and help their business grow. Construction lines of credit offer many perks to the construction businesses that choose to participate. The four main benefits are:
Why Choose a Construction Line of Credit Over Other Financing Options?
1. Cash Flow Shortages
Cash flow is essential for construction businesses. Business loans offer the flexibility of having a cash safety net when money gets tight.
A construction line frees up your construction business’s ability to work on multiple projects or work orders at the same time preventing cash flow issues. You can also balance employment costs and construction supplies with credit when customer payments are delayed.
2. Business Growth
No construction business ever wants to remain stagnant. With the help of credit business loans, you can watch your business grow and adapt to the changing industry:
a. Hire More Employees
Good construction teams rely on high numbers of skilled contractors. To guarantee that your construction business has the best contractors around you will need to use time and money to train and build a quality team.
A Construction line helps buffer any singing bonuses, holiday bonuses, and benefits that you provide for your construction employees. Financial incentives often make incredible returns with happy employees.
b. Expand Marketing Efforts
If you want to expand your construction company, marketing and advertising efforts are essential. Whether you hire an in-house marketing team or outsource to a marketing agency, credit allows you to fund the initiative. You will quickly see your construction company’s reach expand when you invest in quality advertising.
c. Add New Locations
If you want your construction company to expand into multiple locations in your city or state, you need the cash buffer to do so. Adding multiple locations to your construction company is a long process that requires patience, and a line of credit can help make the process easier financially.
3. Own Your Equipment
As your construction company grows, you will want to stop renting equipment and starting owning. At a certain point, owning your own materials is far more affordable in the long run.
Lines of credit offer financial buffers for purchasing construction equipment, but another option is equipment financing.
Equipment financing is a type of small business loan in which money is borrowed for the sole purpose of purchasing equipment. The equipment itself acts as collateral because it is an investment for the borrower.
4. Freedom and Flexibility
Ultimately, the biggest benefit of a construction line of credit is the freedom and flexibility to use the construction line as needed. If you need the credit for hiring more employees one month and then a few months later you need it for purchasing equipment, the decision is completely up to you.
Since you can keep drawing funds as long as you make payments, you don’t have to worry about paying back the borrowed money under a tight deadline. Even if you just want a line as an emergency fund, you can feel confident knowing that you have a flexible buffer of cash.
What’s the Difference Between Unsecured and Secured Construction Lines of Credit?
There are two types of business line of credit for construction. Secured and unsecured. Lets go over the differences.
Unsecured Business Lines of Credit
Unsecured business financing refers to an line of credit option whereby the debt obligation is not collateralized by property or other assets to secure the financing.
Secured Business Lines of Credit
A secured business line of credit uses various for of collateral to secure the debt obligation. Collateral can come in the form of tangible assets such as real estate, equipment or other tangible assets of the business. Intangible assets (such as accounts receivable) can also be a form of security.
**Providing collateral can sometimes make the difference to secure an approval for a business line of credit for your construction business.
Alternative Business Funding Options for Construction Small Business Owners
Traditional financing options may not always be available or suitable for small businesses in the construction industry. However, alternative funding options can provide the necessary capital to fund projects, purchase equipment, or cover other expenses. Here are some of the best alternative business funding options for construction small business owners.
1. Small Business Loan
Short-term business loans are term loans that provide a lump sum of money repaid over 6 to 18 months. When approved, you get a fixed amount of money and a fixed amount you have to pay back. The difference is the cost, with a set payment auto-deducted from your bank account monthly, bi-weekly, weekly, or in some cases daily. A construction loan that is short term has limited paperwork required, and credit standards are more lenient than that of banks or traditional construction loans.
- Rate: Factor rates from 1.09% up to 1.45% (This is not an interest rate)
- Repayment Terms: No term limits. Payments continue until paid in full based on specified percentage collection methods and are dependent on future sales.
- Fees: Origination fees that range 0% to 5%
- Payments: Weekly payments
- Credit History: Poor to excellent accepted; All considered.
- Minimum Monthly Revenue: $10,000 per month
*No down payment required
2. Construction Business Credit Cards
Construction credit cards are revolving lines of credit that offer low flexible monthly payments with an affordable interest rate. Check the loan agreement with a financial institution or bank that is offering business credit cards for interest rate, terms and all your costs.
Frequently Asked Questions
1. Is a Construction to Permanent Loan like a Construction Line of Credit?
Construction to permanent loan is not a Construction line of credit and is considered a renovation construction loan or under the umbrella of construction business loans with a schedule draw of funds once a stage of the project is completed and inspected. If it's a rental property, debt service coverage ratio to calculate monthly or annual income will be used for approval. A down payment may be required for a renovation construction loan.
2. Is a construction loan like a line of credit?
Construction business Loans are loans with a lump sum of money that is provided, with a fixed term, fixed payment, and fixed costs. A line is revolving credit in which you can draw money at anytime up to a credit limit and only pay interest on current balance.
3. Does Advancepoint offer construction line of credit or a new construction loan based on real estate and not revenue?
We currently do not have any products related to property investment or house flipping. You should contact a commercial mortgage company for construction line of credit or a new construction loan. We do know to get a new construction loan you will need a down payment
4. Are Small Business Administration (SBA) Lines of Credit available to the Construction Industry?
SBA not only provides SBA loan programs but also lines of credit. The interest rate on these lines are quite desirable. Keep in mind, SBA loans have stricter business credit requirements whether line of credit or SBA loans, outstanding debts and credit analysis ratios are considered.
There are four types of SBA CAPLines: Construction Lines of Credit
- Seasonal CAPLines: This SBA line of credit is designed to provide cash flow to business owners who experience seasonal peaks and valleys in revenue. Funds can be used to cover increased labor costs and other expenses brought on by your business’s busy season.
- Contract CAPLines: This kind of credit line is available to eligible small businesses that need funding to execute their working contracts. This can cover supplies, labor, materials and more.
- Builders CAPLines: As the name implies, this SBA line of credit is for builders and general contractors who work on residential or commercial buildings. Funds can be used for expenses like materials or direct labor related to building or renovation projects.
- Working CAPLines: This revolving line of credit provides business owners with working capital for all kinds of operating expenses. This can include labor, inventory, manufacturing and more. Working CAPLines may come with higher fees compared with those on other CAPLines.
How to Apply for a Construction Line of Credit
The following are the 4 basic steps to apply for a business line of Credit.
Step #1: Search for the Lender - Determine which lender and/or business loan broker you would like to apply for a business line of credit. Consider experience with business line of credit, customer reviews and reputation when making your selection.
Step #2: Initial Interview with Lender - Conduct an interview with potential lender(s) you may want to work with and determine rates, terms, requirements. Ask what is involved in the application process and what documents will be needed to secure an approval and funding.
Step 3#: Take Application - Fill out application with require business and personal information. Provide necessary documentation to secure approval such as business bank statements and potentially a business tax return (in some cases).
Step 4#: Consider Offers - Once you receive offer you want to consider rate, terms and conditions of offer. Considerations include amount of credit limit, length of time (amortization) of the credit line such as 6, 12, 18, 24 or 36 months. You will want to know how the draw off the line process works as well as how to pay it down. Some lenders are easier to deal with than others on this issue. Additionally, you will want to determine what's involved in extending (or renewing) the credit line.
Step 5#: Make Selection & Activate Line of Credit - Notify your lender of your selection and request agreement as well as closing stipulations to activate your line of credit. Once the boarding process is completed by the lender the business line of credit will be activated and away you go to use the line as you wish!
Getting a line of credit for contractors is not as difficult as one would think. Although not a construction loan, it offers more flexibility that loans do not provide.
Construction line of credit is one of the best types of financing available. If you think your business could benefit from a contractor line, don’t wait to apply.