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.
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 business line of credit, you can cover cash flow deficits and help your business grow.
The best part? 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.
What Is a Business Line of Credit?
A business line of credit is one of the most flexible financing options for borrowing money for your construction business. It 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.
Lines of credit are popular for:
- Paying bills
- New inventory and equipment
- Managing cash flow
- Emergency expenses
- And more!
With a line of credit, you can borrow up to a certain amount 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, you will only pay interest on the $70,000.
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. Many traditional lenders will penalize borrowers for making payments ahead of schedule because they then lose out on the interest gains.
Most lines of credit range between $1,000 to $250,000. There is no repayment term limit, and collateral is not required.
Requirements For Lines of Credit
Qualification factors for business 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 line of credit through AdvancePoint Capital are as follows:
- At least 6 months in business
- Personal credit score above 600
- Average of $200,000 annual revenue
- Business credit bureaus scores
Additional documents will help back up your case. Requirements vary depending on the lender, but you may need to provide some or all of the following documents to fully qualify:
- Bank Statements
- Tax Returns
- Accounts Receivable/Payable
- Profit and Loss
- Balance Sheet
Lines of credit are offered as a type of Small Business Administration (SBA) loan. SBA loans are sponsored by a government agency.
The agency itself does not lend the money, but it exists to help reduce risks for lenders and makes it easier for small businesses to get SBA loans. Working with an approved SBA loan lender will help you secure the right loan or line of credit for your construction business.
Before you get approval, a lender will ask to check your income. In the name of accuracy, you will be asked to provide your gross monthly or annual income before taxes.
Be prepared to show your tax returns from the past two years.
Both your personal and business credit scores are considered, but your personal score takes precedent. Traditional lenders will consider your business credit score more so than alternative lenders.
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.
Lenders often ask you to submit a detailed business plan. Even if they don’t, it is still a good idea for your construction business to write up a detailed construction plan that includes how the money will be used.
Include materials you plan to use, dimensions, expansion efforts, and anything else that you could spend money on. This will help your construction business stay on budget and keep a sound credit score.
It is important for a lender to know about the current balances you have on your credit cards, loans, and other financings. A debt-to-income ratio of less than 45% is ideal.
It is possible that you will have to make a down payment on the credit. The down payment usually ranges between 20-25%.
Why Would Your Construction Business Need a Line of Credit?
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 pursue a line of credit.
High Material 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 working capital on hand will also reduce the shock.
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.
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.
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. Business credit is perfect for cushioning your cash flow when customers don’t pay on time.
How Your Construction Business Will Benefit
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:
1. Cash Flow
Cash flow is essential for construction businesses. Business loans offer the flexibility of having a cash safety net when money gets tight.
Cash flow frees up your construction business’s ability to work on multiple projects or work orders at the same time. You can also balance employment costs and construction supplies with credit when customer payments are delayed.
2. Grow Your Business
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.
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.
Credit 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.
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.
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 credit how you need. 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 of credit as an emergency fund, you can feel confident knowing that you have a flexible buffer of cash.
Apply for a Line of Credit Today
Lines of credit for construction companies are one of the best types of financing available. If you think your business could benefit from a line of credit, don’t wait to apply.
AdvancePoint Capital allows you to get a free quote with no effect on your credit score. Find out if you qualify and start growing your construction business today!