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The Complete Guide to Small Construction Business Loans

10+ min read • Dec 19, 2019 • Jesse Sumrak

Money. It makes the world go round. It fuels projects, feeds mouths, and ultimately keeps your business alive and growing.

If you own a small construction business and find you’d be a lot better off with a bit more cash, rest assured—you’re not alone. Whether your construction business is brand new or relatively small, cash flow will always be top of mind. Even the most successful construction businesses face financial bumps, and that’s not necessarily a bad thing.

Need for a loan doesn’t always indicate weakness or that something is wrong. Debt is a strategic financial tool that businesses should utilize (responsibly, of course). If you never need a loan, you’re probably not pushing your business operations to their maximum potential or efficiency.

Even if capital isn’t a concern now, sooner or later, you’ll likely need a construction business loan. Why? Because often initial deposits and their progress payment schedules don’t perfectly align with project demands. Inevitably, up-front costs, machine repairs and upgrades, materials, employee wages, unexpected expenses, etc. will exceed current money in hand. When that happens, you’ll need capital to complete the project and collect the rest of your dues.

To help you find the best construction loan for your small business, we’ve compiled this ultimate resource. We’ll walk you through construction business loan nuances, use cases, expected terms and qualifications, and which loans should be your first consideration.

Hold on to your forklift—you’re just a loan away from accelerating your construction business’s growth.

What Is a Construction Business Loan?

First, it’s important to distinguish what construction business loans we’re talking about here. If you’re an entrepreneur looking to buy, build, expand, remodel, or refinance property for your small business, you’re going to want to take a look at commercial mortgages—we’re talking about something different.

The construction business loans we’re discussing in this guide are intended for construction companies—the ones doing the building, expanding, and remodeling.

A construction business loan is any loan that’s used to help fund a construction business. These options include equipment financing, term loans, lines of credit, business credit cards—you name it!

Because business needs vary, there’s no one-size-fits-all loan. That’s why we’re going to cover a few popular options and their appropriate use cases below.

Construction Loan Use Cases

You can find a construction business loan for practically any situation. Let’s look at a few common scenarios where a loan could come in handy:

Starting or Expanding a Construction Business

If you’re new to the construction industry or looking to expand your existing business, a little capital could go a long way. To hit the ground running, you’ll need initial cash to buy equipment, hire workers, bid on projects, purchase materials, and market your business.

If you have a blossoming business and are ready for expansion, a loan could help accelerate your momentum. With extra cash, you can more aggressively market your business, upgrade your equipment, expand your services, and serve a broader client base. More money leads to more opportunities.

Buying or Leasing Construction Equipment

Your construction business will need everything from heavy-duty machinery to tools to bookkeeping software. A construction loan helps you buy all of the equipment necessary to start working and earning money. Even experienced construction businesses need to occasionally get a construction loan to lease a unique piece of equipment or replace an older model.

For example, you may need to purchase an additional backhoe to keep a project on schedule, or you may need to replace a worn-out drill. Imagine if your forklift unexpectedly died in the middle of a project and you didn’t have funds in the bank to repair it. Sometimes you can get an advance payment from your clients, but what if you can’t? Construction business loans help cover gaps in your cash flow so you can continue working, completing projects, and making money—no matter what surprises come your way.

Hiring a Capable Construction Crew

Just because you’re a small business doesn’t mean you have to settle for less than the best. A construction business loan can provide the funds to hire and retain a reliable, competent crew. Use the loan for everything from recruiting to compensation to training.

Taking on a new project and need extra hands? Use a construction loan to boost the team’s numbers. Encountering a challenge that requires more specialized know-how? Use a construction loan to bring in an expert. With a little capital, your small business’s crew can compete with the best of the best.

Covering Ongoing Operating Expenses

Managing the day-to-day expenses of a construction business can be one of the most tedious tasks. Salaries, office supplies, legal fees, taxes, insurance premiums, depreciation—these are just a few of the costs you have to cover week to week and month to month.

A construction loan can keep your business operating smoothly by helping you cover these ongoing expenses. No need to slow down operations or downsize temporarily—just use the capital to cover costs until you get paid at the project’s end.

Overcoming Damage or Disaster Expenses

Unfortunately, by nature of the business, disasters will occur from time to time. Earthquakes will damage equipment and property, tools will unexpectedly break, machines will malfunction, hurricanes will flood offices and worksites, and the list goes on. A disaster doesn’t mean you need to close your business’s doors—it just means you need some cash to help you survive the setback.

With a construction business loan, you can use the capital to cover damage expenses and get back on your feet. No setback is too big or tragic for a loan to handle. Once you’ve moved back into bright, sunshiny days, start paying back the funds.

Capitalizing on Opportunities

Need some extra help during the peak season? Did a piece of much-needed equipment go on sale? Is your supplier selling discounted items in bulk? Regardless of what your business needs, a construction business loan can help you seize the day when opportunities emerge.

If you rely on your business’s cash flow alone, you’ll rarely be in a position to capitalize on prime business moments. A little debt now can save you a lot of money in the long run.

The Best Loans for Construction Businesses

Now that we’ve covered several use cases, let’s start getting into the nitty-gritty of construction business loans. If you’ve looked for a construction business loan before, you know the endless number of financing options available. From bank loans to short term loans to invoice financing, you have countless options to consider.

Since there are so many sources of financing you can turn to for construction financing, we’ve compiled a filtered list. Not every option will be right for your business and its unique situation—that’s why it’s important to compare each of these loans contextually.

Equipment Financing

When you hear “equipment financing,” you likely think of shiny, new backhoes, forklifts, and tractors. Yes, construction equipment is completely financeable, but you’d be surprised what else you can finance. Office furniture, software, refrigerators, company vehicles, solar panels, and even the espresso machine—all small business needs you can cover with equipment financing. With flexibility like this, there’s likely not a kooky item on your wishlist that’s not covered.

To qualify, you’ll typically need to be in business for at least 12 months, have a credit score of 650 or higher, and make at least $50,000 in annual revenue. Don’t worry if you don’t check all the boxes—exact qualifications vary by lender and equipment.

Also, you don’t need a large down payment or collateral for equipment financing. Yes, you read that right. Often, the equipment that you’re financing can also act as your collateral, which means you don’t need to empty your bank account or risk your home to secure an outstanding loan. Pretty cool, right?

Lenders determine your monthly payments by looking at 4 factors: loan amount, interest rate, term, and collateral. If numbers aren’t your friend, use our equipment loan calculator to estimate what kind of payments you can afford. Before your eyes get big, remember that the equipment you’re financing often contributes directly to your bottom line. For example, if you’re paying $500 in monthly payments for equipment that saves your employees 50+ hours of monthly work, you’re saving a considerable amount of money in the short-term and long-term.

Business Line of Credit

Similar to a credit card, a business line of credit is a predetermined pool of capital that a business can tap for whatever it needs. It’s incredibly flexible—you can use the funds for practically any business need. Plus, you never have to reapply. You simply use your credit, pay interest on the amount you borrow, repay the borrowed amount, then get instant access to the credit again. Magical!

Every small business can benefit from a line of credit, but especially construction companies. Look back to the use cases above—a business line of credit can resolve almost any of those issues.

Want to hire and train a new batch of employees for an upcoming project? Cover the costs with a line of credit. Need to buy the necessary materials to complete a job? Borrow from a line of credit. Experiencing a dip in cash flow due to late-paying customers? Cover the slow period with a line of credit.

Flexibility is the best part of this type of financing. You can use a line of credit to buy equipment, hire staff, build a new location, pay invoices, install a coffee machine, and more. Because of its flexibility, a line of credit is the perfect safety net to get you out of any bind.

Even if you need more cash than a line of credit can provide, it’s smart to go ahead and acquire this financing to keep in your back pocket. Eventually, you will experience dips in your cash flow or immediate needs that your line of credit can fill. It’s there when you need it, but you’re under no obligation to use it.

SBA 7(a) Loan

Banks issue SBA loans, but the Small Business Administration guarantees up to 85% of the loan amount if the borrower defaults. This guarantee decreases risk to the lender, encouraging banks to extend more SBA loans at favorable rates to small businesses. SBA loans are characterized by large loan amounts, lengthy repayment windows, low down payments, and low interest rates.

Only more established construction businesses will qualify. Qualifications include 2+ years in business, annual revenue exceeding $100,000, a credit score of 650 or more, and mountains of paperwork.

There are a few different SBA loan programs, but the SBA 7(a) is by far the most popular, especially for construction businesses. This loan can provide up to $5 million to fund a wide range of business purposes from materials to machinery to real estate. The SBA 7(a) loan also comes with fantastic terms: loan terms up to 25 years and interest rates as low as you can find. Really, if you qualify for an SBA loan, you’re unlikely to find a better loan anywhere else.

Short Term Loan

Short term loans are fast and flexible. You can qualify and get access to funds in as little as 24 hours, making it very handy for covering unexpected costs. Whether you need to finance a project, survive a slump, or seize a business opportunity, a short term loan is a popular small business option.

With a short term loan, you receive the full lump sum of money up front (up to $500,000) and pay it back over a predetermined period (1–3 years). This loan works best for long-term investments that’ll take several years to pay off. A short term loan helps free up your business line of credit, so you always have access to your flexible credit in case of an emergency.

Qualifying for a short term loan isn’t too difficult. You’ll need a solid credit score, 2+ years in business, and possibly a little bit of collateral.

How to Know When (Or If) You Need a Construction Business Loan

Starting a business is hard. Starting a business with no cash is even harder. If your business is young and in need of capital, a construction business loan could be just the thing you need to get off the ground. If you’ve found countless opportunities to invest in your business, then there’s a good chance a loan could give your business the boost it needs.

New businesses aren’t the only ones with financial problems. Even older, more experienced companies will encounter difficult times. And that’s perfectly fine. Don’t look at a construction business loan as a Band-Aid—that’s only one use for financing. This loan can help you seize bigger, better opportunities and stretch your business to its maximum potential. There’s no shame in reaching out for a little extra capital from time to time. In fact, there’s no better way to accelerate your business’s growth.

Construction business loans aren’t just helpful for starting and surviving—they’re a useful financial tool throughout the life of your business. If you find your business stagnated and going through the motions, look for ways you can inject life and growth into it. Maybe you’re ready to expand to a new location or take on more advanced projects. Once you find your opportunity, look for the financing you need to execute your plan quickly and efficiently.

The Time for a Construction Business Loan Is Now

If you own a construction business, the question is “when,” not “if,” you’ll want access to capital to finance your business. Maybe the time is soon, or perhaps it’s further down the road. Regardless, understanding your financing options now will help inform your financial decisions later.

Waiting around for your bank account to grow and fund future investments is a slow-growth strategy. Less risky, yes, but painfully slow. And giving up equity is almost always more expensive in the long run compared to taking on a bit of debt. A loan gets paid off, but equity costs you a percentage of your company. Forever. That’s why acquiring a business loan is often the best growth tactic and financial decision for small construction businesses.

Even though we’ve narrowed it down to just these 4 loans, it can still be overwhelming to sift through the pros and cons to find the perfect option for your business. We get it.

Remember, you’re not alone! If you need help finding the best loan for your construction business, just try our handy-dandy business loan application. You can complete this application in less than 15 minutes. After that, one of our funding managers will work with you to find the best financing option for your business.

Finding the perfect loan is hard—but we have your back.

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Jesse Sumrak

Jesse Sumrak is a Social Media Manager for SendGrid, a leading digital communication platform. He's created and managed content for startups, growth-stage companies, and publicly-traded businesses. Jesse has spent almost a decade writing about small business and entrepreneurship topics, having built and sold his own post-apocalyptic fitness bootstrapped startup. When he's not dabbling in digital marketing, you'll find him ultrarunning in the Rocky Mountains of Colorado. Jesse studied Public Relations at Brigham Young University.