Entrepreneurs running a construction business will always find they are far more productive when they have better cash flow. Every construction company realizes the importance of money in accepting projects. They realize it’s sometimes important to take on debt for growth. That’s why most of them opt to apply for construction business loans that help improve their company’s financial standing.
The need to apply for small business loans doesn’t necessarily mean that your business is weak. If anything, business loans are practical tools that are essential in realizing the success of a business. Since they won’t be paid until a project is complete, it’s only a matter of time before financing becomes a serious consideration.
If you’re still in the early years of construction business or you’ve been at it for several years, having adequate funding should and will always be your top priority. Here are some of viable funding options you can apply to improve the cash flow of your construction business:
Small Business Association (SBA) Loan
The first thing to know about SBA loans is that the Small Business Association is not the one who’s going to grantan entrepreneur a loan. Rather, they partner with banks and other credit companies to grant small business owners’ access to borrowed funds.
With this type of financing option, the Small Business Administration (SBA) guarantees the loan the banks provide to small businesses. Since the government acts as a guarantor for the loan, the lender faces lesser risks and may even go as far as extending favorable rates to businesses.
However, because the government is involved, the requirement and qualifications can be tough, especially for start-ups. Essentially, the business should be at least 2 years old and have a credit score of 650 or above, and generate an annual revenue of at least $100,000.
SBA loans also come in two forms: the SBA 7(a) and SBA microloans program. Of the two, the SBA 7(a) is the most popular, but more difficult to qualify and apply for.
It provides business owners who need larger amounts of cash for working capital, operational expenses, or for leasing and buying equipment.
Business Line of Credit
The construction industry is not a stranger to constant change. Because of that, many construction companies take advantage of a revolving line of credit where they can access cash quickly whenever it’s needed. Think of it as a credit card where an owner can take the amount they need and repay it in installments plus the interest until a maximum line of credit has been restored.
What makes LOCs ideal for construction businesses is the fact that it’s flexible. This means the funds can be used for literally any business expenses such as buying equipment, hiring staff, or opening a new location.
It’s a perfect solution if your construction business is currently experiencing cash flow issues, and virtually any business can benefit from a business line of credit. To qualify, your business must be at least 3 months old and you also must have a monthly revenue of at least $5,000.
When your application is approved, be sure you know what the maximum credit limit is and pay the required minimum payment on time.
Equipment financing is another funding option that can be very helpful for contractors. It’s specifically used to buy or lease equipment necessary for construction projects such as bulldozers, tractors, cranes, and other heavy equipment. Additionally, equipment financing can also be used to finance office necessities such as chairs, tables, refrigerators, and other essential things.
To qualify for equipment financing, you typically have to be in business for at least a year and ideally, your credit score should be at least 650 or higher. However, qualifications do vary from one lender to another as well as the type of equipment that you need the financing for.
Moreover, business owners need not worry about what collateral to present since the equipment financed will serve as a guarantee instrument for the loan. This enables the bank or lending company the legal right to seize the asset in the event a company defaults on their loan.
An asset-based loan is a financing option that is primarily based on collateral rather than the company’s cash flow. For construction companies, they can use their business assets such as machinery and equipment, real estate, accounts receivables, or inventory as collateral for this kind of loan.
It can come in two forms: an asset-based line of credit or as an asset-based term loan. Contractors usually make use of the former because it’s more flexible and quicker to access.
Asset-based loans also come in handy for companies with a high growth rate as well as those under financial distress. With the funds they receive from a lender, they can refinance existing debts, raise their company’s working capital, or fund business acquisitions.
It’s the perfect financing solution that allows you to increase needed cash flow into your business, for the purposes of spurring growth and expansion.
Need a Business Loan for Your Construction Business?
There’s no denying the benefits of securing a construction business loan you’re your construction company. Not only will it allow you to continue taking on projects, but it will also ensure you operate with a stable cash flow,even during a slow season.