6 Benefits of Getting a Business Loan for Your Construction Company

Business Expansion

Jacques Famy Jr
Review By Todd Millman

The construction industry has unique built-in challenges in operating a business. Whether a general contractor, electrician, plumber, HVAC, home improvement, remodeler, or any other construction trade, there will come a time when business financing is necessary to maintain or grow a small business.

The first step for business owners in that process is to identify the needs and benefits of getting a small business loan, a small business line of credit, or any other small business financing product. Let’s explore why most construction contractors need money for their business and ways to get business loans for your construction company.    

The First Step Is to Identifying Construction Industry Challenges

The first thing for you to identify Is the challenges that are prevalent in the construction industry, as mentioned below:

Finding Skilled Labor

At the core of any construction trade is skilled labor. Any chance of success will require consistent, quality, skilled labor to complete the tasks. Maintaining and growing a skilled workforce will be an ongoing process that will deserve significant attention.  

Completing Projects on Time

Operational management of projects requires organizing, scheduling, performing, and executing in a specific time frame and job requirements. Supplies, labor, and customer requests need to be balanced to achieve the ultimate goal of completing a project on time without jeopardizing quality.

Rising Cost of Materials

Of all the challenges, material costs represent the challenge that contractors can least control. Still, there are strategies and pre-planning that can mitigate costs and improve profit margins, such as purchasing in bulk, anticipating price increases by monitoring supply chains, and participating in co-operatives for material purchasing. 

Productivity/Profitability

Construction contractors need to worry about completing projects with quality on time while also making a profit in the process. So sounds simple, right? But the reality is that many contractors struggle with a profit due to pricing proposals made to “win” the contract or bid. Let’s face it: Price seems to take priority with customers over expertise, experience, and quality of work. But the reality is it doesn’t have to be that way. Reputation and quality at an acceptable cost are what really win. It’s up to the contractor to change that mindset with customers to create a better balance with price vs. quality and win the job more times than not. 

If you build a quality labor workforce, manage material costs, and set proper estimates for profit without compromising the quality, you will win in the long run. It’s not easy, or everyone would be successful, but contractors should know that if you build a quality foundation, the rest is just execution.

Attracting New Business

Finding customers is an ongoing process. Building a strategy that will withstand the ups and downs of the construction/contractor business is key to longevity. The marketing plan should be multi-faceted to include multiple channels of business acquisition methods and not rely on referrals alone. 

Getting Paid! (Invoicing and Payments)

Getting your work orders and invoices can be challenging, especially given the current economy. Taking measures to mitigate potential collection issues will be important, including getting larger deposits upfront and adding more stages from payment to funding in the project. A business credit facility can also help you with revenue flow when customers don’t pay on time or at all. You don’t want to hold the bag without a collection system that deals with these uncertain times. 

benefits of construction loans : challenges of the building industry

Top 6 Benefits of Getting a Business Loan for Construction Contractors

  1. Cash Flow (Working Capital)

As the saying goes, cash flow is king! Having a business credit facility is an essential safety valve for those times when cash flow becomes tight. All construction contractors have those times within their careers. A contractor may balance numerous projects or work orders simultaneously and must balance labor costs and supplies with customer payments and revenue. This delicate balance can be impacted when there is a surge in growth that doesn’t match current revenues or, even worse, an increase in delinquency, delay, or collection of completed work. A business credit facility provides a solution to and creates a buffer for the seen and unseen revenue shortage scenarios that a construction contractor may experience.    

  1. Owning Your Own Equipment

Many construction contractors will rent equipment for specific jobs, but it becomes necessary and cheaper to own the equipment outright at a certain point. Equipment purchases can be expensive, and using existing capital won’t always be an option. Equipment financing could be the solution. 

  1. Marketing & Advertising

Don’t rely on referrals, although that is very important to nurture and build. Even if you are happy not growing your business, you need to protect your business from economic downturns and diversify how you acquire customers. Don't forget to diversify, whether you are focused on getting leads from the internet or joining a chamber of commerce event or other marketing means. Build your new marketing plans around strategies and tactics to help you meet those sales goals.              

  1. Hire Employees and Manage a Growing Team

Skilled labor is the heartbeat of any construction or building trades business. Building a quality team requires time, relationships, training, and nurturing. You cannot compromise if skill sets are not acceptable, as it creates a mediocrity climate in an organization. Financial investment in this area is priceless. Sometimes providing signing bonuses and rewarding productivity through financial incentives can be worth the weight in gold.   

  1. Making Payroll

There can be no room for error when it comes to managing payroll. As a business owner, you made a commitment to your employees that they will be compensated for their work. Not only is it a legal matter but a practical one as well. If workers don’t have faith they will get paid, then the bond of loyalty and commitment will be broken. Having a business line of credit or other business credit facilities can eliminate any possibility of cash flow deficiency impacting the ability to make payroll. 

  1. Business Growth and Expansion

Growth and expansion require planning and can come in many forms.

The following is a list of possible areas of growth or expansion;

  • Expanding to a new facility or location
  • Purchasing equipment and/or machinery
  • Acquiring a large contract, job, or project over an extended period of time
  • A sharp increase in the need for your services due to economic or environmental conditions  

Growth requires a SWOT Analysis. A SWOT analysis lists your business’s greatest strengths, weaknesses, opportunities, and threats. The bottom line about successfully growing your business won’t be a process that happens overnight—it can be a long, arduous, and stressful process, but don’t give up because, with the right plans and financial support in place, you’ll be able to grow successfully.

reasons you need a construction loan

The 7 Best Business Loan Options for Construction Contractors

  1. Business Line of Credit for Construction Companies

A Business lines of credit is a revolving credit line, similar to a credit card, that allows you to draw on-demand up to a credit limit. This is a great option for cash flow shortfalls, working capital, paying expenses or quick purchases.

Product Overview

Rates: 5.50% Interest rates or treasury index plus 1% to 2.5%

Terms: Open revolving line 

Fees: Origination fees range from 0% to 3% 

Payment: Monthly, bi-weekly or weekly 

Credit Standards: Good to excellent preferred, all types considered

Processing Time: 24 hours to 3 days

  1. Short-Term Loans for Construction Companies

Short-term business loans are defined as business loans with a duration of repayment of up to 24 months. Term loans offer a fixed amount up front over a set period of time with a fixed payment. Rates come in the form of an "interest rate" or a "factor rate". Short-term loans are easier to get approved for verses traditional financing because qualifications are easier with more tolerant credit worthiness and fewer documentation requirements.

Product Overview

Rates: Factor rates range from 1.09% up to 1.45%

Terms: 3 to 18 months in duration (typically 12 months or less)

Fees: Origination fees 0% to 5%

Payments: Weekly, bi-weekly, and in some cases, daily 

Credit Score: All types considered

Time in Business: 1 year 

Processing Time: 24 hours to 3 days

  1. Business Cash Advance for Construction Companies

Business Cash Advances (a Purchase of Future Sales) advance a fixed lump sum of money with a discounted purchase price, also known as a specified amount, to pay back. The advance is repaid by taking a fixed percentage of future overall sales

Product Overview

Rates: Factor rates 1.10% up to 1.45%

Terms: Estimated payback periods are 3 to 18 months, but no term limit

Fees: 1% to 3% origination fees

Payments: Weekly or daily payments 

Credit Standards: All credit types, from poor to excellent considered

Time in Business: More than 6 months

  1. Invoice Financing/Factoring for Construction Companies

Invoice financing advances the outstanding balance to business owners to increase the speed of cash flow to the business. This solution provides cash quickly, and there is no need to wait for outstanding invoices to be collected and received by the client with invoice financing in place. Invoice financing has affordable costs ranging from 1% to 2.5% fee off of the face value of the invoice advanced.

Product Overview

Rate: None

Terms: No term limits 

Fees: 1% to 3% fee based on Invoice. Monthly Service fees may apply depending on the volume of invoices factored

Credit Score: The credit of the clients needs to be favorable, NOT the owner advancing off invoices. 

  1. Purchase Order Financing for Construction Companies

Purchase order financing allows businesses to raise capital to pay suppliers upfront for verified purchase orders. Purchase order loans will finance an entire order or a portion of it, depending on the purchase order funder. When the supplier is ready to ship the order, the purchase order financing company collects payment directly from the customer. The purchase order funder will subtract their fees and then send the invoice balance to your business. 

Product Overview

Rate: None 

Terms: No term limits 

Fees: 1% to 3% fee for each purchase order. Monthly service fees depending on volume, may also apply.

Credit Score: All parties need favorable business credit history but all credits considered

  1. SBA 7(a) for Construction Companies

The Small Business Administration (SBA) is the federal agency that offers loan programs to small businesses, serviced by SBA-approved lenders. SBA sets the programs, and guidelines, and offers loan guarantees to approved lenders.

Product Overview

Rate: Interest rates starting at 5.50%, treasury index plus 1% to 2.5%  

Terms: 3 to 25 years 

Fees: Origination fees 0% to 3%

Payment: Fixed monthly

Credit Score: Good to excellent preferred, but all credit considered. 

SBA Standard 7 (a) Loan Program

The SBA loan 7(a) is the SBA’s primary program designed to provide financial assistance to small businesses. The terms and conditions like the guaranty percentage and loan amount, may vary by the type of loans and business. 

SBA Loan Program 504

The SBA 504 loan is a powerful economic development loan program that will provide small businesses with another avenue for business funding while promoting business growth and job creation. The proceeds from SBA 504 loans must be used for fixed assets such as construction, commercial real estate, land or land improvements (and certain soft costs). It can also be used to refinance existing debt. 

SBA Disaster Loans

Economic Injury Disaster Loans (EIDL) not only provide assistance after natural disasters like tornadoes, wildfires or floods, but when President Trump declared Covid-19 a nationwide emergency on March 13th, small businesses were able to access this program for emergency financing.

SBA Payment Protection Program (PPP) Loan

The Small Business Administration (SBA) has established the SBA Payment Protection Program loan. This SBA loan provides loans to small businesses affected by the COVID-19 crisis that need financial help. 

  1. Equipment Financing 

Equipment financing secures equipment as collateral. The requirements demand good to excellent credit to acquire financing, but limited paperwork is required for processing and approval. 

Product Overview

Rates: Factor rates 1.09% up to 1.45% or interest rates from 4.5%

Terms: 2 to 7-year terms 

Fees: Origination fees range from 0% to 3% 

Payments: Weekly or daily fixed ACH payments 

Credit Standards: Good to excellent credit preferred.

Documentation: Low Documentation: 1-page application and invoice for equipment

Time Frames: 24 hours to 3 days

Types of Construction Companies We Serve

  • General Contractors
  • Plumbing Contractors
  • Electrical Contractors
  • HVAC Contractors
  • Home Improvement/Remodelers
  • Landscaping Contractors
  • Handyman Businesses
  • Residential House Builder
  • Commercial Building Contractors
  • Construction Manager
  • Sub-Contractors
  • Demolition Contractors
  • Property Maintenance Contractors

Choose AdvancePoint Capital for your Construction Business Financing Needs

  • Experience. We have been funding construction businesses for years.
  • Trust. We have excellent reviews and feedback from construction companies
  • Loan Specialists. Our business funding specialists know the construction industry.
  • Products. We don’t just offer what we have. We offer what’s available in the marketplace: a variety of construction business loan products.
  • No Cost, No Commitment Quotes

Let’s Get Started and Grow Your Construction Business Now!

The fast, convenient, and straightforward way to get the money you need for your business – now! Get your quote today.

Jacques Famy Jr

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