The construction business can be volatile. Right now, it’s experiencing an upturn, with growth of about 4.5% in 2020, according to the Bureau of Labor Statistics. That means that depending on the market in your region, your business may be so busy that you need a loan to cover the costs of new equipment or other building needs to fulfill all of your contracts.
At other times, you may need to take out a loan to make payroll for full-time employees. There are numerous instances when your construction business may need money at a given time, which is why there’s a financing option that will fit your needs.
Do you need a downpayment for a construction loan?
Depending on the kind of construction loan you choose for your business, you may or may not need a downpayment.
For a standard small business loan, the answer is likely yes. In addition to financial paperwork and information about your business, like expected annual revenue and your personal credit score, a bank loaning money to a small business will want to ensure that the business owner is willing and able to invest some of their own money in the business.
If you’re considering a Small Business Administration (SBA) loan, this is especially true. SBA loans are very popular because they come with low interest rates and longer repayment terms, but they can be more difficult to get approved for than other kinds of financing.
On the other hand, if you’re considering a business line of credit to support your construction business through an especially busy or a particularly slow time, you probably won’t need a down payment. Business lines of credit work a lot like a business credit card, but usually have a lower interest rate and a higher credit limit than a credit card you might use for day-to-day expenses.
Another kind of loan that might make sense for your construction business (and that doesn’t require a downpayment) is invoice financing. The idea behind these loans is that you share information with the bank about money owed to your company, and the bank gives you an advance against those accounts due.
You can usually only borrow a percentage of the total due. When your company is paid, you pay the bank back. This enables a small business to leverage outstanding accounts receivable to support ongoing business, like if you need to purchase additional equipment to take on a new project.
The last kind of construction business loan that doesn't require a downpayment is an equipment loan. This kind of loan is exactly what it sounds like -- a loan design to enable an equipment purchase. The equipment then serves as collateral against the loan. Equipment loans usually have a term of about seven years, which is when the value of the equipment starts to drop.
What are the requirements for a construction loan?
As the owner of a construction company, before you go to the bank you’ll want to get your financial paperwork in order. That means you’ll need to have a good personal credit score of at least 550 to qualify for a secured loan.
To secure a loan at a better interest rate with a longer repayment term, like an SBA loan, your credit score will need to be higher, around at least 650, and you’ll need to have been in business for a few years before you’ll qualify for SBA financing.
You’ll also need to be able to show that your business has annual revenue of at least $100,000 to qualify for most loans.
How much can contractors borrow?
The construction business can be different from other small businesses because you’re often asked to carry the cost of a project until it’s completed. Due to this aspect of the industry, banks calculate the amount you are eligible to borrow slightly differently than other kinds of small business loans.
The term “borrowing base” refers to the amount of collateral a financing company uses to calculate the amount of risk they’re willing to take, or amount they’re willing to lend to a particular borrower based on their assets.
However, for a construction business, because of it’s somewhat unique needs, the borrowing base is often lower. That means if your company has $2 million in assets, you may only be able to borrow $1 million against it.
The answer to how much you can borrow will depend on your business’ unique circumstances and the bank you decide to work with on your construction loan.How do business construction loans work?
Construction business loans work a little differently than other kinds of loans that disburse the entire amount of a loan all at once.
Often, contractor loans come with a schedule that is contingent on the progress you’ve made on the building. For example, you may receive a first payment on a loan when plans are drafted and approved by a governing body, like a city agency. Then, you’ll receive a second payment when the building is framed.
As you draw money from your loan to cover your costs, you’ll likely only be responsible for paying the interest on the portion of the funds you’ve received. You’ll start to pay the principal when the building is complete, and you’ve been paid for your work as well.
You’ll also want to be aware of any fees that come with your construction loan, as they can add up as you move through the process.
How to find the best construction loan for your needs
Finding the best business funding for your construction company is a matter of weighing your options, taking into account the special needs of a high-risk business like construction, and choosing the best loan rate and terms available.
You’ll likely want to visit your local banks, but also do some research online to see if one of the many online or alternative lenders are a fit for your business.
Remember, even if you find a great rate on financing, you’ll want to take into account all the terms of the loan, including fees, and some of the smaller details.
For example, if you’re working with a bank that needs to have an inspection at each stage of the funding process, make sure an inspector will be readily available so you can avoid any unnecessary delays for funding and your project.
How to apply for a loan as an independent contractor or handyman
As an independent contractor or handyman, you have unique small business funding needs related to the construction industry that you’ll need to be aware of when seeking financing.
Like a larger business, you may have equipment or material needs that you need to pay for upfront, or you may have to cover the cost of an expensive license that you need to work, but you can’t pay for the license until you’ve worked and earned some money.
In most cases, a small personal loan is a good option for independent contractors or a handyman. You’ll need a good credit score to borrow, but since the amount you can borrow will be limited, as long as your work is steady as you pay back your loan, you’ll be building your credit score and borrowing history to help you grow your business in the future.