Getting financing as a general contractor isn't easy. Banks and traditional lenders tend to see general contractors as high-risk loan options. Banks are already reluctant to offer loans to small businesses, so when you're a general contractor, the odds are not in your favor.
Why is Working Capital a Challenge for General Contractors?
When you’re a general contractor, you often face a long payment cycle. The time between winning a contract and getting your final payment is a very long time – often several months.
Winning a big contract is a reason to celebrate, but now you need to spend money that you don’t yet have:
- Make a deposit to your sub-contractors in order to get them to commit to the job
- Purchase building materials, so you can start work
- Add more employees to your payroll – but you’ll have to pay their salary long before yours arrives
- You might have to get new tools, like advanced impact fastener tools, improved linear edge reciprocating blades, or performance threading system tools
To add to your financing challenges, general contracting work is both seasonal and cyclical. You’ll get more jobs during the summer as construction increases, but work will slow in the winter months. General contracting is cyclical because the volume of work you’ll get follows the overall economic cycle. During recession, general contracting work slows. In times of economic growth, general contracting jobs improve.
This means that general contractors need to pay overhead and retain the tools necessary to keep their business going, even through long seasons and cycles with little work. This kind of uncertainty means that you can easily find yourself without enough working capital. To add insult to injury, this is also exactly what makes banks unwilling to give you a loan.
Why Do General Contractors Need Working Capital?
General contractors need working capital for a number of issues:
- To buy materials
- To buy tool parts that need replacing, like circular saw blades and bit sets
- To hire new employees
- To secure skilled subcontractors for a job in the future
- To pay basic overheads like gas, electricity, insurance premiums, and rent
- To pay tax bills and accounting costs
- To maintain vans, machinery, and tools in good working condition
- To train assistants and add your own skills by getting specialist certification in carpentry, green building practices, or other niche areas
- To pay for marketing campaigns
What are the Biggest Costs When Starting as a General Contractor?
If you’re just beginning your business as a general contractor, you’ll need financing for initial startup costs, as well as ways to fund ongoing working capital. The total cost of starting a general contracting business can be between $10,000 and $50,000, based on the size of your business, what type of jobs you bid for, and how many employees you have. Before we share the best ways to get financing for your general contracting business, here is an overview of the main startup costs for a general contractor:
- Tools and equipment. Depending on the type of jobs you’ll be bidding for, you might need large and expensive machinery. But even if you’re starting with smaller jobs, construction tools like a handsaw, carpenter saw, pipe wrench and bit holders can run expensive. Even small items like bit sets add up.
- Vehicles. You’ll need a van or something similar to get to construction sites and hold all of your equipment.
- Employees. With salary, benefits, and social security payments, you’ll find that a large amount of your expenditure goes to labor costs.
- Marketing. You’ll get a lot more work when people know that you’re there, so it’s important to have a marketing budget.
- Premises and overhead. You might not need a large office space, but you do need a desk to organize paperwork and deal with invoices and bills, as well as a secure space to lock up your materials and tools when they aren't in use. Overhead costs include electricity, rent, telephone and internet bills, and utility costs.
- Insurance. As a general contractor, you need general liability insurance for you and your employees, as well as automobile insurance for your van. You’ll also want insurance for your tools for in case they are stolen or damaged.
- Licensing. You’ll need to pay a fee to have your business registered as a licensed general contracting business.
The Best Types of Funding for General Contractors
These are the best types of funding to consider for your general contracting business.
Even if you don't qualify for a standard business loan, many banks might give you an SBA loan. SBA loans are backed by the government, so the government promises to pay up to 85% of the value of the loan if you default. This makes it a much less risky proposition for lenders. You can use an SBA 7(a) loan for working capital, servicing existing debt, or buying equipment and tools. An SBA 504 loan is intended for large purchases like real estate or expensive equipment, and an SBA microloan can be used either for working capital and buying materials and tools. SBA loans come with some of the lowest rates around.
The downside to getting an SBA loan is that you’ll have to complete a lot of paperwork, sharing documents like your business and personal tax returns, your profit and loss statement, and a detailed business plan. It also takes a long time for SBA funding to come through – up to 3 months, so it’s not a good choice if you need an injection of working capital in a hurry.
- Average APR: 5%-15%
- Loan process: 3 weeks to 3 months
- Minimum credit score: 680
- Term: up to 25 years, based on the loan type
Although it’s hard to qualify for a standard business loan, it’s not impossible. What’s more, even though your bank might not be willing to give you a loan, you could still get one from an alternative lender. Business loans come with a range of term lengths, from a few months up to 15 years, and can be used for many different purposes. To qualify for a bank loan, you’ll need to share the same documents and information as for an SBA loan – presenting a business plan, business bank account statements, and your recent tax returns are standard.
In order to get the best rates, you’ll need to have a high credit rating, at least 2 years in business, and a strong average annual revenue. If you don’t meet these criteria, you might do better with another financing option.
- Average APR: 4% to 10%
- Loan process: A few days to a few weeks
- Minimum credit score: 600
- Term: 3-18 months for a short-term loan, 1-15 years for a long-term loan
An auto loan is a kind of personal loan that's secured against your new van. Because it uses your new van as collateral, you can get an auto loan even if you have poor credit or very short business history. Auto loans generally have low rates, and they are fast to get – many van dealerships offer on the spot financing deals. However, watch out for crooked auto dealers who demand a high deposit and offer bad interest rates.
- Average APR: 3.5%-15.2%
- Loan process: Instantly to a few days
- Minimum credit score: 500
- Term: 36 to 72 months
With equipment financing or equipment leasing, you can get brand new tools and machinery without tying up your working capital in large fixed assets. You don't need a high credit score to be eligible for equipment financing since it uses your new tools as collateral to secure the loan. Like auto loans, equipment financing and leasing deals can be arranged on the spot with some construction tool companies or construction finance companies. Equipment financing lets you spread the cost of your new tools across several years, and at the end, you’ll own the tools outright. The downside is that by the time you finish paying for it, you might already have to replace them.
Equipment leasing is a way of hiring the tools and equipment you need, long-term. Equipment leasing deals usually include the cost of maintenance and repair. Often, you can upgrade your tools to a more advanced performance threading system or better impact drive bit holders as part of the deal. However, do the math first – you might end up spending a lot more than it would cost to buy the tools outright.
- Average APR: 7% to 20%
- Loan process: A few days to 1 week
- Minimum credit score: 550
- Term: Depends on the life cycle of the equipment
Invoice factoring can be a very good option for general contractors who need working capital. It's a type of short-term loan that uses your unpaid invoices. If you have customers or clients who haven't yet paid, but you need the cash right now, you can sell the accounts receivable to an invoice factoring lender. The lender will advance you a percentage of the invoice – typically 80%-95% of the total. There’s no interest to pay on the loan and funding is very fast – usually within a few hours.
However, many invoice factoring lenders charge you an extra fee according to how long it takes for the client to pay up. If your customers take a very long time to pay, you could end up losing a lot more money than you expected.
- Average Fees: 5%-20%
- Loan process: On the spot to a few days
- Minimum credit score: Not relevant
- Term: 4 weeks - 6 months
Business credit cards
Every general contractor needs a business credit card. Sometimes, you’ll need the safety net of immediate credit at your fingertips. You can use your business credit card for buying materials, tool parts, paying your tax bill, or other working capital purposes. Getting approved for a new business credit card can take just minutes online, but beware, credit cards have the highest interest rates of all general contractor financing options. Only use it for transactions which you expect to be able to pay off in full in the near future.
- Average APR: From 19.99% and up
- Loan process: online approval can be arranged in minutes
- Minimum credit score: 700+ for the top rates
- Term: Monthly billing
Business line of credit
The business line of credit is a flexible loan option that's offered by many banks and online lenders. With a business line of credit, you'll get approved to borrow up to a certain maximum amount, but you can take that money out whenever you’d like. You don’t have to take it all out in one go, and you’ll only pay interest on the amount you actually borrow, not your total maximum credit limit. Once you repay the money, you can borrow it again.
A business line of credit is best for covering gaps in cash flow, and to use as a safety net in case you face an unexpected tax bill or other financial emergency. It's typically easier to qualify for a business line of credit than for a standard business loan, so this is a good option for general contractors with less than perfect credit and a short amount of time in business.
- Average APR: 5%-25%
- Loan process: Same business day or up to 2 weeks
- Minimum credit score: 600
- Term: 6-12 months
The Best Places to Get Funding for General Contracting Business
There are a few lending options for financing for general contractors, no matter what your funding needs are.
As written above, traditional banks are reluctant to lend money to general contractors. However, sometimes they are still worth a try. If you have a high credit rating, good average annual revenue, and a strong business plan, you might still get a business loan from your bank. It’s worth a try, because banks have the lowest interest rates, even though they also take the longest to process your application. Remember that a bank that refuses to give you a standard business loan might still approve you for an SBA loan or for a business line of credit.
Online lenders are fast and easy when it comes to approving loans, thanks to their advanced underwriting algorithms. Some online lenders have a streamlined application system that enables you to apply in just minutes and sends you a response within an hour. Many online lenders will approve you for a business loan even if your bank refuses. Online lenders offer a very wide range of financing options, including business line of credit, auto loans, SBA loans, invoice factoring, and sometimes even equipment financing.
Just remember to check that your online lender is regulated by an official and reliable body before you accept the financing offer. Unlike banks, there's no single body that ensures that all online lenders can be trusted, so it's all up to you to do your own research.
Alternative lenders, both online and offline, can help connect you with a range of financing options. Alternative lenders usually have easier eligibility requirements and accept lower credit scores – but you’ll often pay for that in the form of higher interest rates and inflexible terms. You can access business loans, invoice factoring, auto loans, and equipment financing with alternative lenders, but read the fine print carefully.
Peer-to-peer financing is a new lending model that connects individuals who need to borrow money with other individuals willing to make a loan. It sidesteps the traditional banking model and gives you the chance to convince someone to lend you money even though you were refused by a bank. Peer-to-peer financing is almost entirely available online. Generally, you’ll only be able to get a standard business loan or a secured auto loan through peer-to-peer financing. Rates and terms can vary greatly, so keep your eyes open if you apply for peer-to-peer financing.
Friends and family
Your own friends, family, and acquaintances might be willing to invest in your general contracting business in return for a share of the profits, or just because they believe in you. These loans frequently come without any interest, and certainly without any loan arrangement fees – but you might find that your lender then thinks that he/she has permission to interfere in your business and tell you how to run it. Your investors will probably also request a share of the profits, which can make it hard to keep the business going.
Your own savings
If you’re facing working capital issues at work, it can be tempting to dip into your personal funds to cover the gap. It might seem easy – there’s no interest to pay, no time lag until funding comes through, and no interfering investors questioning your decisions – but it’s usually a bad idea to invest too much of your personal capital in your business. You need to keep your retirement funds and emergency financial cushion intact for the right time; if you pour it into your business now, you’ll have nothing to fall back on in a crisis.