Business Expansion

6 Benefits of Getting a Business Loan for Your Construction Company

Last updated on June 30, 2020

Jacques Famy Jr

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, small business line of credit, or any other small business financing product. Let’s explore the reasons most construction contractors need money for their business.    

The First Step Is to Identifying Construction Industry Challenges

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 at hand. Maintaining and growing a skilled workforce will be an on-going process that will deserve significant attention.  

Completing Projects on Time

Operational management of projects requires the ability to organize, schedule, perform, and execute in a specific time frame specific job requirements. Supplies, labor, and customer requests need to be balanced to achieve the ultimate goal, which is to complete 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, but there are strategies and pre-planning that can mitigate costs and improve margins of profit, 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 profit due to pricing proposals made to “win” the contract or bid. Let’s face it: Price seems to take priority with customers over the 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 wins. 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 on-going 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 a challenge–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 be holding the bag without a collection system in place that deals with these uncertain times. 


Source: Chief Architect Software

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 at the same time and need to balance labor costs and supplies with payments and revenue from customers. 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 at a certain point, it becomes necessary and cheaper to own the equipment outright. Equipment purchases can be a large cost, and using existing capital won’t always be an option. Equipment financing could be the solution. 

  1. Marketing & Advertising

Don’t just 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 downturns in the economy and diversify how you acquire customers. Whether you are focused on getting leads from the internet or joining chamber of commerce events or other means of marketing, don’t forget to diversify. Build your new marketing plans around strategies and tactics that will 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. It requires time, relationships, training, and nurturing to build a quality team. You cannot compromise if skill sets are not acceptable as it sets a climate of mediocrity 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 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 is an organized list of 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.

The 7 Best Business Loan Options for Construction Contractors

  1. Business Line of Credit for Construction Companies

A Business line of credit is an open revolving line. This type of funding allows business owners to draw funds when needed on-demand or make purchases—a business line charges a principal and interest rate. Business lines of credit do have a credit limit that cannot be exceeded without approval and are not open-ended forever. They require renewal either semi-annually or annually to be extended. This business funding is primarily used for small purchases and working capital.

Product Overview

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

Terms: Open revolving line 

Fees: Origination fees ranging 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

Learn More

  1. Short-Term Loans for Construction Companies

Short-term business loans are typically repaid within 3 to 18 months. This small business funding features a lump sum offered up front with a fixed payback amount calculated using a factor rate over a short-term period of time. Rates are not principal and interest but a “factor rate” that costs more than traditional loans. Most businesses choose short-term business loans when they do not qualify for traditional funding. Short-term loans are popular with small businesses because of the reduced documentation requirements and credit tolerances that are laxer than traditional business loans. 

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

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  1. Business Cash Advance for Construction Companies

Business Cash Advances (also known as a Purchase of Future Sales) advance a fixed lump sum of money with a discounted purchase price, also known as a specified amount, to payback. 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

Learn More

  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: Credit of the clients need to be favorable, NOT the owner advancing off invoices. 

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  1. Purchase Order Financing for Construction Companies

Purchase order financing offers businesses the ability 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 balance of the invoice 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 credit considered

Learn More

  1. SBA 7(a) for Construction Companies

The Small Business Administration (SBA) provides programs, guidelines, and loan guarantees to approved lenders for businesses throughout Arizona. The SBA’s mission is to help Americans start, build, and grow their business successfully. The SBA is not a lender. The Small Business Administration (SBA) provides a guarantee that gives the approved lender the ability to take on the risk of business lending under SBA terms that they would not ordinarily do so on their own.  

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 Loan Programs 

SBA Standard 7 (a) Loan Program

The SBA loan 7(a) is the SBA’s primary program and is 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 businesses. 

SBA Loan Program 504

The SBA 504 loan is a powerful economic development loan program that will provide small businesses another avenue for business funding while promoting business growth and job creation. The use of 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. 

Learn More

  1. Equipment Financing 

Equipment financing secures equipment as collateral. The requirements demand good to excellent credit to acquire financing, but there is limited paperwork 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

Learn More

Resources

Face the Construction Industry Challenges Head-On with a Value-Based Business System Approach

THE CONSTRUCTION INDUSTRY’S TOP 5 CHALLENGES IN 2020

6 Ways to Improve Your Construction Company’s Profitability

4 Tactics for Business Growth and Expansion

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.

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* All loans made by either WebBank, an FDIC-insured Utah industrial bank, or Bank of the Internet Federal Bank, an FDIC-insured federally chartered thrift located in California. In connection with the loans, the Banks' underwriting conditions and terms apply.