Landing a big project is a reason for celebration for any construction business. However, if you’re a contractor who bid – and won – on a project that requires a surplus of materials and equipment you don’t have, that celebration may be short-lived, as you may need an injection of cash to get the work done on time.
Or if you’re in between projects, you may want to offer employees extra training, expand to another region or simply add more equipment and tools to your business. Expanding your business may require a large influx of funds.
In both cases, a loan is likely your best bet.
The construction industry is a different beast compared to other industries. Unlike retail or your average service industry business, contractors who need financial help to grow their business aren’t likely to see profits immediately. There are a lot of upfront costs when starting a project, and it’s not unusual for contractors to go unpaid for three, six, or even 12 months. This gap in accounts receivable can put a lot of strain on a small construction company.
Not all loans are created equal because not every business is the same. It may be easier for your friend who runs a tax service to obtain a loan than it might be for you. Financing is more difficult to obtain for contractors because business is notoriously really good or really bad. Banks know this.
Check with your current bank
The best place to start is with the bank you already do business with. It may be more likely to lend to you because you’re a customer. However, the days of judging a person’s character beyond just the numbers listed on a balance sheet are mostly gone. Your odds of being approved for an unsecured loan because you have an honest face aren’t great. Your chances for loan approval might be greater if you choose a local or regional bank – they’re more likely to take a chance on small businesses.
Consider daily payment loans
When you need a lump sum of cash now, you’re willing to sign almost anything to get it. There are lenders out there who make it quick and easy to obtain funds, but it’s certainly not affordable. Sure, you’ll get the $25,000 you need for payroll and materials within a week, but you’re agreeing to pay back something like $35,000 over six months. And you’ll pay on that automatically every day.
Although $200 per day doesn’t sound like a lot, it comes to approximately $5,900 per month. And the interest you’ll pay comes out to about 131 percent. Sounds an awful lot like one of those shady deals you can get at those check cashing places, right?
Find lenders that work in specialized fields
There are lenders that specifically loan money to contractors. They typically understand the risks inherent in the construction industry. While getting money for payroll might be tricky, you may be able to get a loan for new equipment you need to buy. If you default, the lender gets more out of the equipment it will repossess and sell than it will to turn you into collections.
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What you (probably) need to qualify
Banks have different qualifications when they loan money, so you’ll have to check with the lender you’re considering to see what its exact requirements are. However, these are some of the basics requirements:
- Good credit – a credit score above 625
- $250,000 annual revenue or more
- No bankruptcies, liens, etc.
- At least one year in business
If you have bad credit – and there may be a good chance you do after the 2008 recession – you may need to agree to a high interest loan. The good news is that some loans (depending on the lender) come with no penalty for early payoff, so if you get paid (on time) for that big project, you can get out from under those interest and finance charges.
It’s a good idea to have your financial documents all in one place, too, so it’s easier to present when you’re approaching a bank about a loan. Keep these documents on hand:
- Your company’s org chart
- Three years of tax returns
- Documents detailing past and current jobs (include revenue)
- Financial statements for two years
- A list of your owned equipment
- A list of references
Construction is a seasonal business at best, and at worst, completely dormant when the economy is slow. It’s important to keep your savings account as full as possible, but sometimes it isn’t feasible. Loans are a necessary part of the business to keep payroll going and your head above water. Learn how to choose the right loan for you and your business, and you’ll be able to stay afloat or expand your company.
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